Orr stressed that the forecast comes with “an even bigger health warning” than its other economic forecasts because of the inherent difficulties of making such forecasts.
But “relative to our history, that sounds insipid,” Orr said, adding that the starting point for house prices is still very high because, even with the about 17% fall in house prices from their peak in November 2021, house prices remain at the very top end of what RBNZ regards as sustainable.
Orr warned that it isn't only the OCR that influences mortgage rates and that global pressures on longer-term interest rates may mean that fixed-rate mortgage interest rates may not fall much further.
Even with the OCR projected to fall to nearly 3% by 2027, average mortgage rates may not fall from the current 6.4% to about 5.8% because of the impact of offshore funding costs on banks, he said.
RBNZ's latest monetary policy statement (MPS) noted that while non-performing loans remain low compared to past recessions, the number of households and businesses experiencing financial stress is likely to grow even as the economy recovers.
The MPS said that since the end of June, one and two-year mortgage rates have fallen by slightly more than a percentage point, reflecting actual and anticipated OCR cuts.
RBNZ has cut the OCR from 5.5% since August this year and its latest projections leave the door open to another 50 basis point cut in February.
One-year mortgage rates have fallen from about 7.2% to 6% while since August six-month mortgage rates have dropped about 50 basis points.
“Lower interest rates are assumed to support a recovery in demand,” the MPS said.
Household consumption growth is low and residential investment has fallen but RBNZ is expecting both to recover with the OCR falling.
It noted that falling net immigration is weighing on demand for housing and that housing-related inflation is easing.
Excess demand for labour and hosuing have been key reasons for persistent inflation of prices for services, the central bank said.
It noted that demand in the South Island has been more resilient than in the North Island. “This may have reflected the effect of public sector employment cuts, more indebted households being concentrated in Wellington and Auckland and a stronger tourism recovery in Queensland.”
RBNZ is expecting investment and household spending will increase as real interest rates fall.
It is expecting the average yield on the stock of mortgages will decline in coming months.
“This is because most mortgage holders who are rolling off fixed rate mortgages, or who are switching from floating to fixed, will move to lower interest rates than they have been paying.”
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