Private property issue #122 - OCR cut

It’s the news everyone has been waiting for.

The Reserve Bank has cut the OCR for the first time in 4 years (from 5.5 to 5.25%).

But what does it mean for your mortgage? Where will interest rates go? And what does it mean for house prices?

What’s the impact on my mortgage?

Some banks have already cut their rates after yesterday’s news.

Kiwibank cut its floating rate. So did ANZ.

But ASB made the biggest moves.

They reduced all their fixed and floating rates.

At the start of the year, ASB’s 1-year rate was sitting at 7.39%.

They’ve now cut it to 6.59%. That is the 5^th time they’ve cut the 1-year since the start of the year.

An 0.8% reduction in just the last six months.

That could save an investor $4,400 per year (or $84 per week). That’s based on an entry-level investment property with a $550k mortgage and an interest-only mortgage.

If we see another 0.8% cut over the next six months (which isn’t out of the question), the 1-year rate would dip below 6%.

I expect other banks to follow ASB’s lead over the next few days.

Where will the OCR go next?

The Reserve Bank plans to cut the OCR further. This is a big change from their tough-talking stance only 3 months ago.

Their current forecast is that the OCR will hit 3.75% by the end of 2025. That implies a further 1.5% drop.

They plan to do this because they think inflation will soon be back in its box.

In fact, they forecast that inflation will be just 2.3% the next time the data is released (in mid-October).

The downside? The Reserve Bank expects unemployment to rise further. They see it hitting 5.4% by mid-next year.

Those who lose their jobs will feel the brunt of these tough economic times. But those who maintain their incomes (and have a mortgage) will be significantly better off.

What’s going to happen to house prices?

The Reserve Bank has also changed its house price forecasts.

They now say that house prices will be flat in 2024 before picking up in 2025.

They think that prices will go up 4.8% throughout 2025.

So, if you buy or own properties, you should expect those values to rise over the next few years.

Keep in mind that these forecasts are backward-looking.

If you want to make the most of the 5.5% house price increase the Reserve Bank forecasts for March 2026, you need to buy (or own) a property in March 2025.

If you buy in March 2026, that rise in house prices may have already happened.

How fast are we going to see rates fall?

There’s been some suggestion that mortgage interest rates won’t fall as fast as the OCR. Simply because banks were already pricing it.

I don’t buy too much into all of that.

Yes, banks pre-empted the cut by lowering their lending rates ahead of time.

Interest rates peaked earlier this year and have been coming down over the last six months.

But the Reserve Bank has confirmed what everyone anticipated. It strengthens the view that rates will come down. So, the Reserve Banks change in stance should lower interest rates further.

Expect the housing market to roar back to life over the next year.