Interest Rate Trend
The Reserve Bank of New Zealand (RBNZ) in November 24 reduced the Official Cash Rate (OCR) by 0.50%, bringing it down to 4.25%. This reduction is part of a series of cuts aimed at stabilizing the economy. As a result, mortgage rates have also decreased, with Banks offering a competitive 6-month fixed rate at 5.99% and a 12-month fixed rate at 5.75%. These lower rates are expected to boost borrowing and stimulate the property market.
CoreLogic NZ Property Insights
Property values in New Zealand fell by 0.2% in December 2024, marking the ninth drop in the past 10 months. The national median value now stands at $803,624, which is 3.9% lower than a year ago. However, there are signs of stabilization, with some regions showing slight increases. The market's performance in 2024 has been influenced by high mortgage rates and a weak labour market.
Property Market Projection
House prices in New Zealand are broadly projected to rise by 5-7% in 2025. This growth is expected to be driven by lower interest rates and improving consumer confidence. However, the market remains balanced with ample housing supply, which may moderate price increases.
Economic Outlook
The New Zealand economy is showing signs of recovery, with falling interest rates providing relief for borrowers. However, challenges remain, including higher unemployment rates and cautious consumer spending. The housing market is expected to benefit from these lower rates, with increased activity anticipated in the first quarter of the year.
Tony Alexander's Perspective
Independent economist Tony Alexander believes that while interest rate falls will provide some relief, the extent of these reductions may be limited. He anticipates that borrowers will be lucky if more than another 0.5% comes off fixed mortgage rates for periods of two years and beyond. Alexander also highlights potential inflation risks and suggests that the housing market may experience mild upward movement in prices and turnover in 2025.
Fixed Rate Strategy
Given the interest rate trend and current economic landscape, an option is to consider fixing your mortgage rate for a period of 6-18 months followed by a longer-term rate of 3-5 years. This strategy offers a balance of short-term flexibility to benefit from the current OCR downward trend and long-term stability, protecting you from potential interest rate fluctuations in an uncertain market environment. There are many other factors to consider, so please reach out to us prior to fixing.
Construction lending
For those planning to build or renovate and take advantage of current build capacity, various banks offer construction loans designed to keep costs down during the construction period. Borrowers can draw funds in stages as the project progresses, paying interest only on the amount drawn. This flexibility helps manage cash flow effectively during construction and with $0 provisional sum contracts becoming prevalent in the market this can be a more cost-effective acquisition for new builds than purchasing a turnkey (completed) build.
Bank Test Rates
Banks in New Zealand use servicing test rates to assess mortgage applications. These test rates are higher than current mortgage rates to ensure borrowers can handle potential interest rate increases. These test rates have fallen from 9.5% 12-months ago to around 7.5% today which allows greater borrowing capacity. This has been particularly beneficial for first home buyers who have been active in the market.
Future DTI Impact
The Reserve Bank of New Zealand introduced debt-to-income (DTI) restrictions in July 2024. These restrictions limit the amount borrowers can borrow based on their income, with a cap of 6 times their income for owner-occupiers and 7 times for property investors. We are currently seeing approvals up to 5 times DTI at current interest rates. This policy move aims to promote financial stability and prevent market over-leverage.
Stay Informed
For more detailed insights and personalized advice, please contact your Kea Mortgages adviser. We are experienced in commercial and residential mortgage lending and are here to help you navigate the complexities of the market to achieve your financial goals.
Warm regards,
The Kea Mortgages Team
