Given the Reserve Bank’s clear indication that the official cash rate (OCR) would have been increased in mid-August had it not been for lockdown – and the recent hawks/doves/white heron speech – it was no surprise that the OCR was increased today (Wednesday 6 October, 2021), and by only 0.25% not 0.50%. In fact, in light of continued strength in the economic data (e.g. August filled jobs), and even taking into account still-considerable COVID uncertainty, the far bigger shock would have been no change.

Attention will now quickly turn to what’s next and, all else being equal (which can’t be taken for granted), today’s OCR rise looks likely to be followed up with another 0.25% increase at the last meeting for this year on November 24th, taking the OCR to 0.75%. Thereafter, the RBNZ’s latest projection is that the OCR could rise to around 2% by the second half of 2023.

For the property market, the clear implication from this is the rise in mortgage rates that’s already underway has much further to run (which could also be amplified, or mitigated, by other factors, such as changes in offshore financing rates). It’s not hard to imagine that a typical one or two year fixed rate could be pushing 4% by the end of next year and 4.5% into 2023 – still low by past standards, but a large proportional increase from current levels.

Higher mortgage rates clearly mean that borrowers are going to have to divert more money towards paying their mortgage, and some may not be able to access as much home finance as before. Either way, this is another headwind for the property market, in addition to regulatory changes such as tighter loan to value ratio rules and the phased removal of interest deductibility for investors. We already get the sense that some property deals have started to get a little stuck, with buyers just pulling back a little but vendors not budging on the asking/reserve price.

On the whole, we’ve all still got a tricky period to negotiate. But recent events haven’t materially altered the property outlook. Our view is that sales activity and price growth are close to (or at) a peak, and that both will ease for the rest of 2021 and into 2022. However, with unemployment low and in the absence of a GFC-style credit crunch, a full-on property downturn still seems unlikely – especially since the expected end point for interest rates will still be low by historical standards.