Economists Predict: What’s Next for Rates + House Prices?

In our last post, we unpacked predictions that leading New Zealand economists have made about mortgage interest rates and house prices over recent years, and what Kiwi homeowners could learn from them.

Today, we’re looking at the next chapter: what do these same economists foresee for the coming year or two, and how might it impact us all?

TONY ALEXANDER’S PREDICTIONS

Leading economist Tony Alexander recently shared his view that while inflation seems to be under control for now, local factors (things like wages or the cost of rent) could push it up again in the future.

With this in mind, he cautions against too much optimism with interest rates. To keep inflation under control, the Reserve Bank may need to keep interest rates steady - or if there is a drop in interest rates, they may not fall as far or as quickly as we’d hope. And if inflation rises again, interest rates will likely follow suit.

Because higher interest rates make mortgages more expensive, NZ house prices may remain flat or even drop slightly.

CAMERON BAGRIE’S FORECAST

Cameron Bagrie sees the current period of economic difficult as a “big reset” - where the economy needs to make some important adjustments to get back on track.

With this “big reset” underway, Cameron believes the Reserve Bank may approach interest rate changes cautiously. They won’t rush to lower rates if the economy isn’t fully stable. This could mean higher mortgage rates for a longer time, making it tough for people looking to buy their first home or refinance.

With fewer people able to afford a mortgage, house prices could very well stay steady, or even dip a bit. For current homeowners, this means slower growth in home equity.

So, while Cameron believes Kiwis will start to feel some economic improvement in 2025, he expects a slow recovery.

STEPHEN TOPLIS’ OUTLOOK

Stephen Toplis correctly predicted that the NZ economy would continue to struggle in the first half of 2024, and felt we would see more businesses closing and a rise in unemployment (i.e: people losing their jobs). While he expected some improvement in the second half of 2024, which we have seen, he also warned the job market could take longer to recover. In fact, he’s predicted the unemployment rate could peak above 5.5% by late 2025.

With unemployment still on the rise and businesses closing, the Reserve Bank might hold off on lowering interest rates until they see solid improvement. This could keep mortgage rates high, which affects affordability for home buyers and cools the housing market. And if rates stay high at the same time that unemployment rises, fewer people would be looking to buy homes - especially those worried about job security - so house values may stay flat or even drop slightly in certain areas.

IN SUMMARY

Not the best news, unfortunately - these economists all expect the current challenging economic environment to persist for the next couple of years at least. High interest rates may stick around longer than we hope, as inflation isn’t fully under control. This will continue to make it tough for people with mortgages and first home buyers.

Rising unemployment and cautious economic recovery could also keep house prices from increasing much, and we may even see falling prices in some areas.

For those with a mortgage, this means budgeting for potentially higher repayments. For buyers, waiting for the market to settle might be wise. And for current homeowners, rapid gains in property value aren’t likely.

OK, BUT WHAT DO WE THINK?

We asked our mortgage broker Craig for his thoughts on these predictions, and what the next year or so might hold. Here’s what he had to say:

"Back a few years ago when we could get a fixed rate as low as 2.19%, nobody ever thought we’d see interest rates around 7%. How wrong we were! It’s certainly been a tough time for all.

Thankfully we’ve seen some big cuts to fixed term rates recently - with the one year rates falling from the high sixes to mid fives. That’s definitely going to help a lot of families who’ve been struggling with the higher rates over the last year or so.

There’s been a fair bit of commentary lately that the Reserve Bank may cut interest rates again on 27 November 2024. While the OCR may indeed be cut by the Reserve Bank on the 27th of November 2024, I think banks may have already priced this cut into / accounted for this cut in their current advertised rates.

Fixed interest rates are not just priced on what the Reserve Bank does locally, they are also impacted by what is happening in overseas economies, movement in currency exchange rates, and what expected inflation may be globally.

At the end of the day, listening to economists is a good thing - while they have a good record of correctly predicting things, their timing isn’t precise. The things they expect to occur may be over the next year or two.

Personally, due to both good and bad experiences over my 20+ year career, I’ve learnt to focus on what‘s being offered at the time I actually need to do something with my home loan interest rate, and not significantly before. While I do take economists’ predictions into account, they’re not a deciding factor for me. Sometimes this approach works out well, sometimes it doesn’t - like not taking that 5 year fixed rate at 3.99% a couple of years ago!

At the end of the day, you and I can’t control interest rates or the housing market. But there are things in our control.
Regardless of where the economy is at, there are steps that can be taken to save money on our mortgages and pay them off quicker. With a solid financial advisor as your guide, you’ll be well-placed to take advantage of economic upturns or cushion yourself against any setbacks.

Keen to discuss your wealth’s health? Contact us today and let’s chat!

Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.