In the bank’s latest Property Focus they say although floating and six-month fixed mortgage rates have not changed much since last month, median mortgage rates one year and longer are all up, with the biggest change in the two-year and five-year rates.
These changes reflect the unwinding of two-year specials, taking the dip out of the mortgage curve.
“Given how fragile the economy is, we don’t expect to see aggressive RBNZ tightening this year, and instead only expect the OCR to rise towards 3%, which is where we and the RBNZ see as neutral,” the economists say.
“Put that forecast together with the steeper mortgage curve out to two years and the general drift up in mortgage rates, and mathematically that combination implies limited value in fixing for more than one year.”
For those who do wish to fix for longer, the bar is higher beyond two years given the additional cost. The three-year and five- year rates are now well above 2025 lows (by 0.70ppt and 0.74ppt respectively). But the bank says this is not the time to be wedded to any forecast and it is keeping an open mind.
The bank’s new OCR forecast calling for the RBNZ to hike in July, but by less, implies less value in fixing for more than one year.
It’s not so much our forecast itself; it is the fact that financial markets are expecting more OCR hikes than we are – about 140 basis points versus our expectation of 75 basis points – the economists say.
These market expectations, which have been exacerbated by higher global interest rates, have lifted wholesale interest rates beyond levels consistent with the ANZ’s OCR forecasts. “If our forecasts are correct, it’s hard to justify longer fixes.”
Last month the bank thought terms like the two-year offered a good mix of certainty and low cost, but with mortgage rates higher now, and its forecast that the RBNZ won’t have to hike by as much, especially if it hikes earlier, it now sees less merit on a pure cost basis in fixing for more than one year.
The economists say this is borne out in breakevens, which show the need to expect the one-year rate to rise by more than 1% (from 4.65% to 5.73%) over the next year for fixing for two years to be cheaper overall.
“That could happen, but our forecast is for the OCR to ‘only’ rise by 75bp to 3%.”
ANZ’s mortgage rate projections only have one- and two-year rates rising to about 5.1% to 5.3%.
However, uncertainty is high because of the Iran war and the bank warns against taking any forecasts as gospel.
“And the range of plausible outcomes is far wider than the range of forecasts you’ll find.”
Some borrowers will want certainty in such circumstances, even if it comes at a cost. If that is the case, the bank thinks it makes sense to perhaps consider fixing for slightly longer, like 18 months or two years, and/or allocating a portion of debt to longer terms like the three-, four- and 5-year terms.
These rates are more expensive than they were in late 2025, when they were nearer 5% than 6%.
House price restraints
On house values, the bank says even though it doesn’t see interest rates going to the high levels experienced in the wake of the pandemic, it thinks they will go high enough to restrain house prices.
One way of estimating the extent of upward or downward pressure of mortgage rates on house prices is by comparing mortgage rates and net rental yields (rents less council rates, insurance and maintenance as a percentage of house prices).
Right now, rental yields don’t look especially compelling given where mortgage rates are heading.
“This tells us that house prices are still stretched when you weigh up rents, mortgage rates, and other costs such as council rates.
The other headwind for house prices is the upcoming general election.
So far, the most directly relevant feature for the housing market is the Labour Party’s commitment to introduce a capital gains tax (CGT) on residential investment property and commercial property.
It is also still considering additional tax changes, such as reinstating a form of limiting interest deductions.
The economists say It’s not just a CGT that could change on the policy front.
General uncertainty about the election – whether about housing taxes or the wider policy landscape – could keep investors, and a wider range of buyers, on the sidelines until the end of the year too.
“It’s a matter of ‘add it to the pile’, with uncertainty rife across a range of things that matter to the housing market: including growth, employment, wage growth, interest rates, construction costs, consumer confidence, and immigration.”
Uncertainty in and of itself can take the wind out of the market’s sails (sales).
The bank, however, continues to see a modest increase in house prices as likely from 2027 onwards as an economic recovery settles in.
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