Slowing Inflation Signals Possible Reduction in Mortgage Rates with Changing Home Loan Regulations Looming

Date Published: 31 January 2024

Key Facts

• Consumer price inflation has cooled from 5.6% to 4.7%, reducing the likelihood of an increased official cash rate and suggesting that mortgage rates may have peaked.
• Discussion is shifting towards the prospect of a cut in the OCR, potentially as early as August.
• From mid-year, the Reserve Bank may introduce caps on debt to income ratios but simultaneously ease loan to value ratio rules.
• First home buyers accounted for 26% of property purchases in 2023, a new high, capitalising on low deposit lending allowances and reduced competition from investors.
• Potential draws for investors in 2024 include rising rents, eased deposit requirements, potentially lower mortgage rates, and increased mortgage interest deductibility.
• Despite modest rises in the NZ Activity Index, there are still concerns about potential recession risks and economic hardships.
• New economic data, including jobs data and sentiment indicators, are due for release this week.

Article Summary

The slowdown of inflation from 5.6% in the third quarter (Q3) of last year to 4.7% in Q4 means that pressures on the cost of living are lessening. This slowdown also means that the official cash rate (OCR) is unlikely to increase again, leading to speculation that mortgage rates may have reached their peak. Even more, discussions are shifting towards the possibility of a cut to the OCR in the near future, potentially as soon as August 2022.

From mid-2022, the Reserve Bank could potentially introduce caps on the debt-to-income ratios but at the same time ease the loan-to-value ratio rules. This proposed policy change, coupled with high mortgage rates, could serve to increase market activity in the second half of the year through a relaxation in deposit requirements.

First home buyers formed a record 26% of property purchases in 2023, largely due to the ability to tap into KiwiSaver for their deposit and accessing low deposit lending allowances from banks. This group also enjoyed decreased competition from other buyer groups such as mortgaged property investors. However, there are some economic factors that could potentially make the market more attractive for these investors in 2024, including rising rents, eased deposit requirements, lower mortgage rates, and increased mortgage interest deductibility.

While economic indicators suggest the country might avoid a technical recession, households are likely to continue to face economic challenges. Fresh economic data, including jobs data and sentiment indicators, due to be released in the near future are likely to cast more light on the state of the economy.

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