Anticipated Interest Rate Drop Could Benefit NZ Home Loan Borrowers, Says Mortgage Firm CEO

Date Published: 12 January 2024

Key Facts

• Home loan borrowers could see rates reduce by a full percentage point in the next few months, according to David Cunningham, Squirrel chief executive.
• The anticipated rate decrease is due to the significant drop in wholesale rates before Christmas.
• While an official cash rate (OCR) drop is not expected until mid-year, banks could quickly reduce fixed rates.
• Despite expectations of reducing inflation, the Reserve Bank must look to the future and may express comfort with falling interest rates to stimulate the economy.
• In New Zealand, loan prices have not returned to their Covid peak, unlike in many other countries, partly due to a substantial portion of home lending on short-term fixes.
• Home prices could regain momentum if interest rates fall and the economy improves, but a rapid acceleration is not expected.
• Construction consents for new homes have significantly decreased, likely due to concerns about potential price trends.

Article Summary

David Cunningham, Squirrel’s CEO, predicts a significant drop in home loan rates in the next few months due to a sharp fall in wholesale rates before the end of last year. He anticipates most fixed interest rates to decrease between 0.5% and 1% by March. Despite the lack of an official cash rate (OCR) drop until mid-2021, banks could rapidly adjust fixed rates.

Cunningham suggests that the Reserve Bank might be comfortable with decreasing interest rates to stimulate the economy while maintaining a prudent stance. The central bank needs to consider the future instead of inflation rates, which are already dropping faster than expected worldwide. New Zealand is likely to follow this global trend.

Interestingly, New Zealand stands out in the global housing market as one of the few countries where house prices have not yet returned to their Covid peak. This is partly because many of the country’s home loans are on short-term fixes, resulting in a greater impact from low interest rates. Construction consents for new homes have also fallen by 24% compared to the previous year, possibly due to developers’ concerns about prospective price trends. As home prices stabilize, confidence in starting new developments may increase, but the impact could take years to manifest.

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