Recovery interrupted?

Earlier this month, the Reserve Bank raised the Official Cash Rate to 2.5%, the first increase in more than three years. Many commentators didn’t pick it. Cotality chief economist Kelvin Davidson had expected a hold; Westpac’s economists described the move as unexpected. BNZ took the opposite view, noting the hike was broadly in line with what markets had already priced in.

In June, we argued the property recovery had been interrupted by the Iran War, which held interest rates higher than planned because of a temporary oil shock. Once that shock passed, the path back down would reopen.

Why this time is different

The oil shock is fading, not worsening (though, as I write, the US has announced another wave of attacks on Iran, prompting Brent crude oil prices to surge past $90 a barrel). When the Strait of Hormuz partially reopened, global oil and petrochemical prices fell, as did the Reserve Bank’s own near-term inflation forecast. Annual inflation is now at 4.1% for the June quarter, slightly lower than the Reserve Bank pencilled in back in May. If the story were still “Iran War delays recovery,” this is the point where rate relief should be getting closer, not further away.

Instead, the Committee raised the OCR, as it believed the rate was sitting below what the Bank considers a neutral setting, and financial conditions, including a lower exchange rate and falling wholesale rates, had loosened more than it wanted. In its own record of the meeting, the increase was intended in part to avoid an unwarranted further easing of financial conditions.

This cycle is being negotiated meeting by meeting against a domestic backdrop that shows slowing economic activity through the June quarter, weaker card spending, and softer business surveys, even as growth is projected to resume in the September quarter. The Bank’s internal Kiwi-GDP model points to 0.6% growth over that period.

What it means for your mortgage

Not much changes immediately for anyone already fixed. Some of the expected OCR increases were already built into longer-term rates before the decision landed. The more telling shift happened before 8 July: for six months running, roughly half or more of new lending has gone onto fixed terms longer than a year, with the two-year term the most popular choice, while the one-year fix (historically the default) has fallen to around a fifth of new lending. Borrowers are paying a premium for certainty because nobody, including the banks setting the rates, is confident about where this cycle ends.

Anyone refixing in the next few months should consider how much a longer fix is worth as insurance against another year or two of upward drift.

House prices haven’t moved much either way

The Reserve Bank’s own assessment puts national values down 0.4% over the year to May, with housing market activity described as subdued and residential investment contracting in the March quarter, despite a strong run of new dwelling consents over the past year.

ANZ’s economists, ahead of the July decision, were forecasting a 2% fall in prices for the year, pointing to rising mortgage rates, election-year uncertainty over housing tax policy, and the drag from the oil shock. That forecast assumed the rate rises they were calling for would happen. Now that the first one has landed, there’s more reason for that call to hold than to be revised upwards.

The recovery is still waiting on the same three things it was waiting on in June – lower mortgage rates, rebuilding confidence, and a supply pipeline that keeps thinning as construction activity lags behind consent numbers. All three have just been pushed further out.

Hold your position, but recalibrate the clock

Population growth, the construction slowdown, and the underlying housing shortfall still matter, but what’s changed is the assumption about when relief arrives.

In June, the working estimate was a delay of six to 12 months from the Iran War’s onset in February, putting the recovery somewhere between the second half of this year and early 2027. A normalisation cycle that some banks see running through to mid-2027 makes the earlier part of that range look optimistic.

The dates worth watching next are the RBNZ’s September and October reviews, when the Committee will show whether it’s serious about further tightening or whether July was a one-off correction. Investors leveraged tightly enough that another 25 or 50 basis points would strain serviceability should treat those meetings as the real test.

Thinking about how a longer rate cycle changes your portfolio strategy?

Call 0800 GOODWINS or visit goodwins.co.nz