Key Facts

  • The Reserve Bank has held the official cash rate (OCR) steady at 5.5% for the fourth consecutive time.
  • Due to high inflation, more rate increases might take place in the coming year.
  • Despite a drop in spending per household, high demand due to an increase in the country’s population isn’t easing off fast enough.
  • Domestic housing and construction costs continue to be high even as food and oil prices decrease.
  • Wage growth is easing, labour demand is lowering, and inbound migration is driving up population and labour supply.
  • The Reserve Bank states that further boosts to OCR may be necessary if inflation persists.
  • Prime Minister Christopher Luxon expresses disappointment at the Reserve Bank’s possible need to increase OCR, blaming the previous Labour government’s economic policies.
  • CoreLogic Chief Property Economist warns that “reasonable falls” in short-term mortgage rates are unlikely in the next year.

Article Summary

Mortgage holders in New Zealand might be facing tougher times ahead. The Reserve Bank recently froze the official cash rate (OCR) at 5.5%, marking the fourth time it kept this rate unchanged. High inflation, however, could prompt further rate boosts early in the new year.

Several factors contribute to this scenario. The population increase in the country has led to persistent demand despite decreasing household spending. Furthermore, the cost of housing and construction stays steep even when food and oil prices have slumped. The Reserve Bank revealed in their statement that wage growth is also moderating, labor demand is softening, and inbound migration is adding to the overall population and labor supply, leading to higher inflation risk.

While the current OCR level is believed to be controlling demand, it may need to be escalated if inflationary pressures carry on. In addition, Prime Minister Christopher Luxon expressed disappointment concerning the possibility of OCR elevation, attributing it to the economic decisions made by the previous Labour government. Meanwhile, the new government plans to fight inflation by reducing spending.

Finally, the Chief Property Economist of CoreLogic, Kelvin Davidson, warned that the likelihood of “reasonable falls” in short-term mortgage rates within the next year is dwindling. As such, new borrowers may face difficulties passing serviceability tests, while current mortgage-holders need to prepare for increased debt servicing costs. These factors could eventually suppress housing market activity and prices.

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