Bigger rate cuts, cheaper mortgages on the cards - but there’s a cost

1. A weaker economy than anybody imagined

Last week’s Stats NZ data showed that the economy contracted by 0.9% in Q2, more than anybody had been expecting. The economic indicators in Q3 – such as retail card spending – have been better, so we may not necessarily be in another technical recession. However, the problem is that the 0.9% contraction in activity implies there’s more spare capacity in the economy than previously thought, which further raises the chances of an inflation target undershoot down the track, as well as risking unnecessary disruption, such as job losses now.

Before the Q2 figures, most experts expected two OCR cuts of 0.25% before the end of the year; however, a cut of 0.5% in October followed by 0.25% in November is looking more likely. On one hand, this is bad news, given it’s a reaction to the weak economy. On the other hand, mortgage rates might have further to fall, especially for floating and shorter-term fixes.

2. Inflation under control?

Another reason to expect further OCR cuts ahead is that recent inflation concerns could be fading a little. While the price of key items such as food is still rising, up by 5% in the year to August, rents are flat to falling. In other words, when you aggregate it all up, price pressures aren’t necessarily receding fast, but they’re not getting worse either. This is largely consistent with the Reserve Bank’s expectations, so inflation is unlikely to prevent further OCR cuts.

Cotality chief economist Kelvin Davidson: "First-home buyers continue to dominate in the current market, accounting for 27.5% of purchases in July and August." Photo / Peter Meecham

3. First-home buyers still strong

Property sales activity unexpectedly fell by around 5% in August compared to the same month in 2024, but I’d say this will prove to be a blip. Indeed, at 87,875 over the past 12 months, sales are at roughly their highest level since mid-2022.

First-home buyers continue to dominate in the current market, accounting for 27.5% of purchases in July and August, according to the latest Cotality Buyer Classification figures. Clearly, lower house prices and interest rates are a support, but many first-home buyers are also tapping into their KiwiSaver for at least part of the deposit, as well as making full use of low-deposit lending.

In addition, property investors don’t appear to be blunting first-home buyers. Mortgaged multiple property owners made 25% of purchases over the above period, a return to their average position. Movers remain the key underperforming group, with their market share currently below average.

4. Is the big switch still ongoing?

On Wednesday, we’ll get the Reserve Bank’s mortgage lending figures for August. I’ll be watching the overall activity flows, as well as the split by interest-only vs repayment, loan to value ratio, and debt to income ratio. But bank switching has arguably been the biggest focus lately. There’s a lot of it going on, as people roll off existing fixed rates and chase a cashback at the new bank. Another record high could be set in August.

5. Fingers crossed

And finally, keep an eye out for the NZ Activity Index and ANZ’s consumer confidence reading, both for August. After the poor Q2 GDP result, let’s hope they’ll bring some better economic news.

- Kelvin Davidson is chief economist at property insights firm Cotality