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Significant recovery underway

Kiwibank chief economist Jarrod Kerr says interest rate cuts could start as early as May next year.

Friday, September 22nd 2023, 10:32AM

by Sally Lindsay

Outlining his views to a Bayleys Old vs New Property webinar, Kerr says inflation will be at 4% by the end of the year, tracking down to 3% next year and back down to 2% over the next 18 months to two years.

He says the next move  from the RBNZ, whose job this time next year will be well and truly done, is a rate cut. “We’ll start seeing mortgage rates, business lending rates, all interest rates in the economy starting to come off and head in the right direction because we're clearly in restrictive territory at the moment.”

The interest rate rises that haven’t been seen in decades will be reversed next year, Kerr says. “I think cuts will come as early as May next year when the RBNZ starts cutting the OCR. “That gives the RBNZ a full 12 months after its last rate hike in May this year to assess the economic damage. And, it has caused quite a bit of economic damage which is actually ongoing.”

Kerr believes the RBNZ will take the cash rate from 5.5% back to 3% reasonably quickly. “That will provide a lot of mortgage relief for bank customers.”

Kiwibank has been lifting mortgage rates for 18 months and Kerr says it has really hurt. While half of the country’s mortgage book has rolled off low interest rates, the other half will roll off over the next six months. “There's still a lot of economic pain coming through that's going to cause another, I think, six to nine months of stress for many households.”

He gives the example of a household with an $800,000 mortgage. Eighteen months ago the household would have been paying $20,000 interest, now they are paying $55,000-$60,000 on that mortgage. “That’s a lot of extra money the household has had to find and it is suffocating parts of the economy.”

Property prices rising again

From a property perspective, the recovery is underway. “Property prices have bottomed and they're starting to head north. That first phase of the recovery over the next six months will continue. It's that second phase where interest rates start coming down, boosting confidence, boosting leverage in the system that will cause, I think, a second leg – a second wave in the property market.

“Mortgage and financial advisers as well as developers are starting to tell me that not only is confidence returning to the market, but the cost of building is starting to head the other way. With prices starting to come off, the market has turned a little bit for construction and inflation pressure coming out of the housing market is starting to ease.”

Kerr says is the recovery is being helped by 100,000 new migrants pouring into the country, but it also highlights the lack of housing supply. 

He says with two-and-a-half people per household, the country is 40,000 houses short just for the new migrants. “Looking back, 2013-2019 had the biggest migration boom this country has ever seen and modelling at the end of that showed the country was short 100,000 houses. We still have a significant shortage and it’s all on the supply side.”

Unfortunately, Government policies such as changes on interest deductibility, the CCCFA and rising interest rates have been attempts to deal with demand, but demand is not the problem – it’s supply, Kerr says. “The population's increasing but supply of housing, infrastructure, health and education isn’t.

“The existing migration boom, that's likely to continue, is only going to add demand to a housing market which is already short on supply. And then, of course, tourism is bouncing back as well. And that has implications for property and regional markets.

While house prices bottomed out in May and there have been a good few months of price increases, Kerr says the true litmus test is going to be over spring and summer. He says house prices should continue increasing and then next year, if rate cuts kick in that will just add fuel to the housing market, which has basically corrected 17-18% peak to trough.

He believes house prices will rise at least 5% next year and there will be slightly larger gains the year after that.

Tags: Kiwibank

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Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.45 7.05 6.85
ANZ 8.64 7.99 7.69 7.49
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.39 7.09 6.89
ASB Bank 8.64 ▼7.39 7.05 6.85
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.35 7.05 6.85
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.95 7.65 7.45
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.10 - -
Co-operative Bank - Owner Occ 8.40 7.30 7.05 6.85
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.80 7.55 7.35
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.99 6.85 6.65
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.85 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.59 7.29
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.35 8.05 7.79
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.35 7.05 6.89
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.90 7.75 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.30 7.89 7.69
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.30 8.89 8.69
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 8.05 7.65 7.29
SBS Bank Special - 7.55 7.15 6.79
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 7.05 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.19 7.89 7.65
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.39 7.09 6.85
Unity 8.64 6.99 6.99 -
Wairarapa Building Society 8.60 7.15 6.94 -
Westpac 8.64 7.99 7.59 7.35
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.39 6.99 6.75
Median 8.64 7.45 7.40 6.87

Last updated: 7 December 2023 9:28am

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