Kiwi Mortgages


Rising Interest Rates & House Prices



News with Tony Alexander – October 2023

Last month, I wrote about the divergent impacts on interest rate movements in New Zealand coming from China and the United States. The outlook for China’s economy is relatively weak and that means weak demand for New Zealand commodity exports which in turn means falling incomes for our farmers and that means weaker growth for the New Zealand economy. The Reserve Bank’s intention when raising interest rates is that the pace of growth in the economy slows down and this reduces the ability of businesses to pass on cost increases into the prices they charge consumers. The extra weakness in China is helpful for the Reserve Bank and on the face of it means interest rates can decline earlier than would otherwise be the case.

However, at the same time as China’s economy has been slowing down since early this year, the economic data for the United States have surprised on the strong side especially for their labour market. The past month has brought further surprises and an increase in market expectations that the Federal Reserve will need to raise interest rates again. In particular, there has been a change in expectations regarding the speed with which interest rates will fall over 2024.


Read This – Rising Interest Rates – What should you do?


It looks like any declines won’t happen until very late next year and that is relevant to interest rates here in New Zealand. The world’s financial markets are centred around the United States and when American interest rates go up this tends to place upward pressure on interest rates in other countries. Because US interest rates have been increasing for the past few months we have seen increases in the costs which banks in New Zealand must pay in order to borrow money both here and offshore.

The outcome has been further upward movement in fixed mortgage rates. It would be good to say that economists like myself are now extremely confident that interest rates have peaked. But every single time we’ve said that over the past year we have been wrong. This is one of the most uncertain environments for making predictions which I have lived through.

It is not just the fact that we are in a post-pandemic environment which none of us have experience of, we are also facing uncertainty related to artificial intelligence, climate change, unusually tight labour markets, the uncertain lagged impact of excessively loose fiscal and monetary policies at the same time, a changing global geopolitical environment, and now in New Zealand record net migration inflows.

Awareness of the migration boom in New Zealand now looks to be relatively high and as I have mentioned in the past it is when people acknowledge a surge in population growth is underway that the true impact in the housing market will start to appear. That is the point we are at now.


Read This – When will Interest Rates drop?


There certainly continues to be a lot of talk about Kiwis leaving the country and the net loss over the past year has been 40,000 which is not far off the record net annual loss of 44,000 seen early in 2012. But there are so many people coming into our country from the likes of China, India, the Philippines, and South Africa, that the population has been boosted an extra 1.9% over the past year.

All these people need somewhere to live and that means landlords are now finding it relatively easy to secure good tenants. The next impact is likely to be an acceleration in the pace of rent increases. But at the same time we are now seeing investors moving back into the residential real estate market and this is adding to upward pressure on prices which has been occurring since June.

Average house prices in New Zealand have been rising just below 1% a month since June and we can reasonably confidently say that the upward leg of the house price cycle has now begun in earnest. First-time home buyers have been driving the market since February but my most recent survey of real estate agents shows a net 14% observing more investors entering the market. This is the first positive reading for this indicator since the start of 2021 and it is accompanied by other measures showing rising investor activity.

For instance, I asked the agents to indicate what the factors are which are motivating investors to make a purchase. Whereas six months ago only 7% said it was expectations of house price rises now that proportion sits at 25%. House price rises beget more house price rises and there is something very important to note about the situation at the moment.


Read This – Low Deposit? – Kainga Ora First Home Loan Scheme


The upward leg of the house price cycle has got underway with interest rates not only at above average levels but still rising. Because we economists fully expect that inflation will be beaten and interest rates will fall from some point in 2024 you may have noticed an increase in predictions for what house prices are going to do in the very near future.

You’ll struggle to find predictions beyond the next 12 months, but I am already on record from many months back saying that I expect average house prices to rise 5% this year, 10% in 2024, and 15% or more over 2025. Factors which I expect to contribute to prices rising firmly over at least the three years include strong population growth, falling new house supply until 2025, falling interest rates from some point next year, new measures pushing up the price of construction of new houses, and a potential change in government bringing the slow restoration of interest expense deductibility.

Housing markets move in cycles and October will likely be month 5 of the upward leg of that cycle.

For borrowers it still seems reasonable to expect that the Reserve Bank will be easing monetary policy in 2024. But uncertainty about the timing of that remains extreme. If I were fixing my mortgage rate at the moment, I would probably still be looking in the 12 to 18 month area but can fully understand why recently the two year term has been quite popular with many people.

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By Tony Alexander


The opinions expressed in this article are the personal views of the author and is not a financial advice or recommendation from Kiwi Mortgages or any of its officers, who shall not be liable or responsible for any information, omissions, or errors present in the article. Please seek specific financial advice before taking any action.