Why lower rates might not necessarily lead to higher property prices

After the Reserve Bank of New Zealand (RBNZ) reduced the official cash rate (OCR) cash rate from 5.50% to 5.25% last month, and signalled that the OCR was likely to keep falling, many people assumed this would inevitably lead to higher property prices. But that may not be the case, CoreLogic Chief Property Economist Kelvin Davidson wrote in a column for Trade Me.

Mr Davidson acknowledged that RBNZ forecasts suggested the OCR might fall to 4.00% by the end of 2025, which would reduce mortgage rates to about 5.50% – and that, as a result, there was scope “for a bit of upwards pressure” on property prices.

“Certainly, the post-COVID period has reinforced how powerful an influence interest rates really are in the housing market, even though in the near-term it could be via a boost to sentiment rather than a dramatic improvement in the actual day to day position of households’ finances. Indeed, personally, I wouldn’t be ruling out some kind of short-term lift in property values,” he added.

However, Mr Davidson also said there were “plenty of reasons” to think property prices were unlikely to rise significantly.

“For a start, many housing affordability measures remain at or near their lowest (worst) levels for at least 20 years, including both mortgage payments and rent as shares of median household income,” he said. 

“In addition, there’s still plenty of listings/stock sitting on the market available to purchase. 

“On top of that, although the arrival of OCR and mortgage rate cuts might dissuade some cash-strapped investors from a possible sale, others who have found themselves off the hook for capital gains tax sooner than they expected (due to the reduction in the Brightline Test) may well choose to list.”

Meanwhile, the unemployment rate, which is currently at 4.6%, is likely to continue rising, due to the weak economy, potentially reaching about 5.5%, according to Mr Davidson.

“That will tend to subdue the housing market, even if for most people it’s actually via the adverse impact on their feelings of job security (rather than an actual job loss),” he said.

Finally, Mr Davidson noted that the faster mortgage rates fell, the quicker the debt-to-income (DTI) ratio restrictions would bind – “tying prices more closely to incomes over the cycle and slowing down the rate at which investors can grow a portfolio, unless buying new-builds (which are exempt)”.

However things play out over the next 12-24 months, there will definitely be some people looking to take advantage of lower interest rates. If any of your clients are thinking about buying, please introduce them to me so I can help them get a great home loan deal.