ANALYSIS: In a move almost universally anticipated, the Reserve Bank’s Monetary Policy Committee raised the official cash rate by 25 basis points today to 2.75%. It's the second increase this year, and consistent with the Reserve Bank’s stated intention to remove monetary stimulus. At this stage, there is little sign the committee feels the need to take interest rates beyond a neutral level.
The trouble here comes in two ways. First, the neutral interest rate is always hard to figure out, and it tends to rise over time – typically upward as a period of economic growth lengthens. Second, it is bold of the Reserve Bank and most analysts to expect that accelerated growth in the New Zealand economy will be accompanied by falling inflation. Bold – though not impossible.
The Reserve Bank also signalled it was mindful of the risk that businesses would seek to rebuild crunched margins once growth conditions are stronger. But it also spent considerable time discussing the many uncertainties facing all of us, including inflation, the fraught global geopolitical environment, the coming El Niño spring/summer period, migration flows, exchange rate movements, etc.
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What does it all mean for borrowers? We should expect banks to raise floating mortgage rates by 25 basis points. A hike in the OCR had already been priced into fixed wholesale borrowing costs, which means there is little immediate pressure for fixed mortgage rates to be adjusted. In fact, because today’s comments from the Reserve Bank were a tad less worrisome regarding inflation than those made in July, some borrowing costs have eased marginally.
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However, it is likely that as we advance through 2026 into 2027, we will see further increases in fixed borrowing costs, especially if some of the inflation risks I believe are in play come to the forefront – especially business margin rebuilding and council rates rises to beat the coming 4% cap.
For the housing market, there are no immediate implications unless a lot of people didn't expect interest rates to go up. My monthly survey of real estate agents with NZHL shows, however, that 42% of agents feel that buyers are worried about interest rates going higher.
This helps explain why the housing market is flat, with prices either holding steady or easing slightly. In fact, a net 41% of agents in my survey feel they are falling.
Independent economist Tony Alexander: "Almost half of the agents surveyed said buyers were worried that prices will continue to fall after they make a purchase." Photo / Fiona Goodall
FOMO remains almost non-existent, with only 6% of agents saying buyers are displaying worries about missing out. The peak for this measure was 92% late in 2020.
Agents report that first-home buyers retain a strong presence in the market, but a high net 49% feel that there are falling numbers of investors looking to make a purchase. We should expect that situation to continue for some time, given the uncertainty around the election outcome and the policies that might follow, as well as low expectations for capital gains.
Apart from asking agents whether they think prices are rising or falling, I get one other indication of price changes when I ask them about buyer worries. I noted above that rising interest rates are one such fear. Almost half of the agents surveyed said buyers were worried that prices will continue to fall after they make a purchase. We call this FOOP – fear of overpaying.
House prices will rise again eventually, but the pace of growth is likely to be slower than in previous cycles for a variety of reasons, including the absence of structurally falling borrowing costs, increased house supply, decreased investor net returns, and an aging population.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
