Commentary by CoreLogic NZ Chief Property Economist Kelvin Davidson
Today's 0.25% increase to the official cash rate (OCR) was fully in line with expectations, given inflation itself slowed in Q1 this year. In addition, future inflation forecasts on the part of both business and consumers have also pulled back a little in recent months.
While today's decision was widely anticipated, uncertainty about what happens next for the OCR and mortgage rates had risen. Last week's budget was more stimulatory for the economy than anticipated and could hold inflation higher for longer. However, in the published forecasts that supported today's Monetary Policy Statement, the Reserve Bank (RBNZ) were less reactive to recent stimulants such as the budget and higher-than-expected net migration. They reiterated their expectation that inflation won't be back within the 1-3% target range until Q3 2024 – the same guidance they provided in the February MPS.
The RBNZ still envisage a technical economic recession later this year, though it is expected to be a more modest one than published in February. And although the RBNZ expect to have seen a 0.3% increase to GDP in Q1 2023, New Zealand may actually have already been through a recession over Q4 2022 and Q1 2023 if the NZ Activity Index (NZAC) is anything to go by.
Employment remains high, and the unemployment rate is tipped to peak lower (5.4%) and sooner (end of 2024) than previously expected (5.7% by first half 2025). The RBNZ's forecast for property also predicts house prices to drop further by only 3.5% by Q1 2024, although the majority of that is expected to occur in 2023 (-3.2%).
The most intriguing projection however was the OCR track itself, which, following almost every other economist shifting the forecast peak up, was expected to be at least 5.75%. The RBNZ outlook stayed the course though, with the forecast peak remaining 5.5%, with cuts now expected to be brought forward. Beginning in the third quarter of 2024, the RBNZ forecasts the OCR to drop below 5% by the middle of 2025 and below 4% at the start of 2026.
So, what does this mean for mortgage rates? It would now be very surprising to see short term mortgage rates change much, if at all, as a direct response to today's OCR shift itself, as this has largely been priced in. Indeed, with no change to the forecast peak, market pricing may actually come back a little after recent data and commentary had started to push things in the other direction – the RBNZ may have quashed those expectations.
In terms of what this means for the housing market, on balance, it could be pretty neutral. Mortgage rates are still high and unlikely to shift lower in a hurry so the current expectation of having a little bit further to go in this downturn remains. Additionally the extra strain on those existing borrowers who are yet to see their fixed loans reprice onto current interest rates is still to come. That could be especially concerning for the minority of borrowers who may actually move onto a new interest rate higher than their original test rate.
But strong net migration and fading recession risks would tend to work in the other direction. Overall, we still think that this downturn is close to ending – for better or worse - depending on your perspective. But with affordability still stretched and caps on debt to income ratios for mortgages looming next year, there's unlikely to be a fast rebound either.
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