After three-and-a-half years, inflation is beaten. That was the message from the Reserve Bank last week as it cut the official cash rate (OCR) by 50 basis points to 4.75%. Interest rates fell immediately. What will this mean for the housing market, the wider economy, and our clients?
Will This put a Fire Under the Property Market?
Well, it might be more of a tealight than an inferno, but it is a step in the right direction.
If you’re in the market for a property, this a fantastic time to be looking. We are sitting at the intersection of low prices, plenty of listings, greater borrowing capacity and falling interest rates. This is probably the strongest buyers’ market we’ve seen in recent memory – even the aftermath of the GFC didn’t result in this perfect storm of favourable buying factors. This is a limited-time opportunity, and it should attract buyers to make their move, which will help drive sales and hold prices steady.
For those in the construction industry, the OCR cut is a tiny ray of light in fairly dark times. The sector is struggling, and the lower interest rates will help with the cost of debt. The government is beginning to greenlight more commercial projects, which will pump money into that side of the industry. For residential developers though, prices and presales are down, consents are low, and the numbers on many developments won’t stack up favourably. However, developers who can find the right deal should benefit from a rising market in 2025 and through to 2026 and beyond. (More on that below.)
Helping Fuel a Wider Economic Recovery
There’s an old joke that New Zealand’s economy is just a housing market with extra bits attached. It’s a slight exaggeration, but an improving property market does provide kindling for the economy as a whole.
Once the housing market begins to improve, the immediate industries around it get a boost. When the people who work in those industries feel more confident about their jobs and incomes, they start to spend money. As house prices recover, homeowners with secure employment feel more comfortable about spending. Plus, with lower interest rates, they start thinking about using the equity to pay for renovations, new cars and boats, private school fees and holidays. With spending radiating out into the wider economy, other sectors start to improve. Finally, once most people feel safe in their jobs and with lower interest rates, New Zealand should experience stronger GDP growth in 2025.
Don’t get too excited, though. Local economists predict we’ll only see very slow-burning growth in our housing market, so all this will take some time. We may not see prices reach their previous 2021 peak again until 2026 or 2027. That’s probably the best-case scenario – a slow, steady recovery is surely preferable to the boom-and-bust cycle of the past four years.
Quality Projects Looking for Funding
Although it’s tough going for the construction sector, there are always smart people ready to capitalise on opportunities. There are deals to be done in this market, and savvy developers have been picking up sites at outstanding prices. Deals that would never have stacked up at 2022 prices are suddenly looking not just feasible, but profitable – and those developers are now looking for funding. Banks might be opening their lending books for homeowners, but they remain reluctant to fund small-scale developments at the early stages.
Here at Zagga, we noticed a distinct increase in inquiries in September, and there’s now a sense of optimism in the air that was missing throughout winter. We’ve had some high-quality projects come across our lending desk, with margins built in even if the market remains flat. If prices start to increase, the developers should outperform their forecasts, and that success will help them move on to their next project. The latest OCR has meant the phones have started ringing – so it’s shaping up to be an exciting summer. We are working on bringing some strong loan investments to the platform, so keep an eye out for those in the lead-up to Christmas and the new year.