Squirrel: How Quickly Will Mortgage Rates Fall

When will mortgage rates fall? It’s a question on the mind of every Kiwi with a mortgage. Squirrel’s John Bolton gives his expert opinion on which way they are headed:

The Reserve Bank (RBNZ) has had some big surprises up its sleeve for us over the last 18 months. By contrast, the recent Official Cash Rate (OCR) announcement was about as predictable as they come. Sticking to the path it laid out for us in July, the RBNZ opted to hold the OCR steady at 5.50% – and the big themes of its commentary remained broadly the same.

It’s seeing plenty of evidence that higher interest rates are having the desired effect (the economy is slowing, and inflation is coming under control) so there’s nothing to suggest rates will need to go any higher.

And it’s still anticipating that things will need to stay at this level for “the foreseeable future” – although it suggests it could now be as far out as 2025 before rates start to fall, rather than the mid-2024 timeline given previously.

We haven’t seen any major changes to mortgage rates off the announcement, and I’d be very surprised if we did. The banks (rightly) copped a lot of flak for hiking interest rates after July’s OCR announcement, even though there was no change then, either. So this time round, I think they’ll keep things exactly as they are.

Mortgage rates: many recessionary forces at play

While the RBNZ’s saying it might be 2025 before rates start to come down again. my view’s a little different. There are a lot of recessionary forces at play out there right now.

There’s the recovery in immigration, which has taken some serious wage pressure out of sectors like hospitality and retail. We’re now seeing the unemployment rate starting to climb, slowly but surely. And with National and ACT having said they’ll significantly reduce the size of government if they win the election, that would help to address talent shortages within the private sector even further.

Food prices also seem to be normalising somewhat, as we recover from the short-term inflationary impact of the weather events we had at the start of the year. The RBNZ called out slowing global economic demand as a major factor for consideration, which is starting to have a negative effect on exports and commodity prices.

Fonterra has announced a 12.5% cut to dairy payouts as a result of reduced demand in China. That alone will mean roughly $1.4bn less flowing through New Zealand’s economy.

I’ve talked before about the fact that China’s economy is in real trouble right now. And ultimately, I think what’s happening there is going to have major implications for New Zealand, and how quickly interest rates start coming down again.

Mortgage rates: China’s slowdown a ripple effect

Unlike the rest of the world, China is grappling with deflation on a number of fronts. Consumer confidence has completely evaporated in recent months, and demand has fallen out of their economy. It’s spelling trouble for China’s manufacturing sector. After expanding production in recent years, falls in domestic (and global) demand are creating a large oversupply problem.

As a result, manufacturers are dropping prices to try and get rid of excess stock. Oversupply means less demand for resources and falling commodity prices.

China’s housing market is also extremely weak. We’re hearing more and more stories emerging of developers either collapsing or defaulting on loans. China has been on a debt-fueled property binge for the past decade, and if you think NZ prices are high relative to incomes, that’s nothing compared to China.

Indications are that even food prices in China are deflationary now, which shows just how relatively weak its economy is. I’ve said before that deflation is probably the one thing Reserve Banks fear more than inflation, and for good reason.

When a major economy stalls in the way China’s is, it has a serious ripple effect. China is our biggest trading partner by a long shot. It’s Australia’s, too. So the consequence of China’s slowdown for our economies promises to be significant.

New Zealand’s export sector has been performing relatively well of late, even while other parts of the economy, like construction, retail and (to an extent) hospitality have taken a big hit. But now, with weakening demand overseas – particularly in China – we’re seeing weakness emerge in our export and commodity prices as well. There is no good news in that equation.

Higher mortgage rates: hurting Kiwi borrowers

Bear in mind, too, that the screws are still being tightened on Kiwi mortgage borrowers as more and more of us roll off lower fixed rates onto rates around 7%. That’s more money coming out of our back pockets, at a time when all these major parts of our economy are weakening. To me, all of this suggests that we’re headed for quite a big, extended recession. It might not cut too deep, but it is going to be around for a while.

And when the RBNZ insists rates will have to stay high for the foreseeable future, I don’t think these risks are factored in yet. So, even though most economists will be working towards a 2025 date before rates fall, if the risks I’ve discussed materialise, I wouldn’t be surprised if it starts happening around the middle of next year.

This is just my view of the world, so only time will tell who’s right.