It’s been more than four years since the official cash rate (OCR) started climbing, and over a year since it plateaued at 5.5%. But we finally have some movement in the right direction, with the Reserve Bank of New Zealand (RBNZ) trimming it to 5.25%, making us collectively breathe a huge sigh of relief.
Signs point to further falls, with the RBNZ forecasting the OCR will be below 4% by the end of 2025. With businesses and households feeling the pinch, this should signal an exit from the bottom of this economic cycle.
Heading out of a tough winter
The winter of 2024 has been a low point for economic activity, and it’s certainly felt like a nadir for many across New Zealand. The economic data has been grim: nine periods of falling retail sales, shrinking per capita GDP figures, and an increasing number of households in financial stress.
Credit keeps a consumer-driven economy moving smoothly. And New Zealand is hugely dependent on its property market to grease the wheels. Families use revolving credit to pay educational fees and buy new cars. Small business owners use it to cover payroll and taxes. As mortgages becomes less available, the economy’s gears begin to grind. House prices have declined every month since February, which erodes confidence and borrowing power. In response to this and other factors, households have tightened their wallets.
For Zagga, while higher rates means higher investor returns, it also means less activity and fewer loans overall. A dropping interest rate cycle may mean lower returns, but also more loans available regularly for investment. Additionally, more activity in the property market will help stabilise property prices upwards, which means the underlying security has a lower risk attached to it.
A brighter spring and summer ahead
As the days get longer and the weather improves, the general mood always tends to brighten up and this year should see a corresponding uptick in consumer sentiment.
There is still some pain on the horizon as unemployment rises, so the improvement won’t be rapid. The most likely interest rate scenario is a gradual fall from now through to the end of 2025 (although unexpected events could easily change that trajectory). Banks’ test rates will fall correspondingly, so more borrowers will qualify for loans, which is likely to lead to more activity in the housing market. The rules of demand and supply tell us that eventually, this will lead to price recovery, taking house values back to their previous peak and perhaps beyond.
When Kiwis feel confident in their house values, and have more money in their pockets, they spend more – on products, restaurants, holidays and renovations. This drives the economy out of the doldrums and into another growth phase. Smart investors will be getting their ducks in a row now, positioning themselves to take advantage of rising house prices and improving business conditions.
Here at Zagga, we’ve been working to strengthen our relationships with brokers and financial advisors. This is helping us secure high-quality loans that provide solid, fair, returns for our investors. We’re noticing more enquiry, our investor demand is high, and we’re ready to meet the demands of a more active housing market.
The OCR cut is the sign we’ve been waiting for that the recovery is now set to begin, and we are forecasting more loan investments arriving on our platform as we head toward summer. We believe that 2025 is going to be the biggest year yet for Zagga, so expect to hear a lot more from us over the coming months.