What do lower interest rates mean for property prices?
By Chelsea Traver
On August 14th , the Reserve Bank of New Zealand cut the Official Cash Rate (OCR) by 0.25%. Mortgage holders and property investors alike rejoiced at this signal of lower mortgage rates to come. This will hopefully flow into the pockets of homeowners with lower mortgage costs and potentially an increase in house prices.
However, while there are significant tailwinds for property price growth, there are also some headwinds to consider. Mortgage rates are an important driver of the housing market, but they aren’t the only influence. In this article, we consider what factors will benefit and what will weigh on house price growth.
Tailwinds
Decreased Mortgage Costs
There has been increased optimism after the RBNZ rate cut as it has a direct impact on mortgage rates. In August, mortgage rates are lower across the board, with the median rate were lower across the board, with the median rate falling between 0.4% and 0.7% for terms 1 year and longer. They are expected to continue decreasing over the next year.
In this past season of high mortgage rates, many people hesitated to take on more debt. Going forward, lower mortgage rates will make property a better investment from a cash flow perspective, which may increase the demand for this investment. It also affects first-time homeowners as they are more likely to feel confident taking on a mortgage now that the borrowing cost is lowering.
New Property tax rules
Significant changes have also been made in how property is taxed, including restoring interest deductibility and reducing the bright line test from 10 to 2 years. With interest rate deductibility, property investors can use the interest paid on their mortgage as one of their expenses, reducing the tax they pay. If you buy and sell a property, the bright line test measures when you have a capital gains tax to pay. With the shortened timeframe as long as you sell after 2 years, you will not have capital gains tax. Both adjustments make property a more attractive investment, increasing demand and hence prices.
Headwinds
Property prices are still falling
In July, property prices continued to weaken, with the REINZ House Price Index falling 0.6% m/m. This downward trend will take some time to reverse.
Deteriorating Economic Conditions
Interest rates are falling earlier than expected because economic conditions have weakened more than anticipated. This includes a deteriorating labour market and rising unemployment, especially in Wellington. Additionally, the labour market generally lags behind the broader economy meaning when economic conditions weaken, business income is reduced, and then people are let go. If people are concerned about their jobs, they won’t be in a rush to move house or buy a rental property.
Net Migration Cooling
While annual net migration has been at record levels over the past year, this is quickly cooling. Unemployment is rising, arrivals into the country are easing, and departures are surging at a record level. The main leavers are young adults who might have otherwise been looking to enter the housing market. This suggests a weaker demand for housing.
What does this mean for you?
Property prices will rise…likely slowly
House prices do go up over the long term. Like any investment, there will be fluctuations over time, but the decrease in mortgage rates is a good sign for property prices. However, there are also significant headwinds that will affect how quickly and how much house prices will grow. ANZ expects that this year, property prices will stabilise, and there will be a gradual recovery in prices in 2025. This seems a reasonable assumption given the current property dynamics along with the relatively weak economy.
While house prices are likely to go up, many economists (as well as ourselves) don’t expect the same growth rates as investors saw historically. There have been widespread shifts in the economic landscape, which would make this high, sustained growth unstainable.
