Interest rates are a focal point in the property market. The fluctuation of these rates, influenced by political, social and economic factors, invariably impacts both property investors and homeowners alike.
The question on many Kiwis' minds is: "Where are interest rates heading over the next few years?"
As of October 2023, the property market has witnessed a surge in interest rates, propelled by a combination of low interest rates, high government spending, and a tight labour market, which collectively have nudged inflation upwards. The Reserve Bank has responded to this by elevating the Official Cash Rate (OCR) to temper the economy, a move that has a twofold impact on property investors: escalating mortgage costs and diminishing cash flow for investment properties.
The forecast for interest rates has been a subject of meticulous analysis and prediction. In 2022, predictions indicated that the 1-year fixed mortgage interest rate would rise to 7% in 2023, a projection that has proven accurate with BNZ's 1-year rate at 7.19% and KiwiBank's at 7.15% as of September 2023. The anticipation is that this rate will retract to approximately 6% in mid-2024, further declining to 5.5% by mid-2025, and settling around 4.5% from mid-2026 onwards.
However, it's crucial to know the inherent uncertainty in these predictions. Global events, such as the unforeseen pandemic, the war in Ukraine, and significant flooding, have all unpredictably pulled the economy in various directions. While exact numbers may not be spot-on, the general direction of interest rate trends is the focal point of these predictions.
While some banks have marginally higher 1-year rates, the general consensus is that interest rates have peaked. Over the last three months, banks have reduced their longer-term 3-5 year interest rates (April – July). The 5-year rate peaked in January 2023 at 6.96%, and as of the current data, the average has descended to 6.4%. The 2-year rate also peaked in January at 6.58% and has only slightly fallen back to 6.53%.
The 1-year rate, which is often the focal point for many New Zealanders, has risen from 6.36% to 6.92% over the same period and appears to still be on an upward trajectory. While it is believed that interest rates have reached their zenith, the 1-year rate may still experience a slight increase, and the floating rate is likely to follow suit.
Comparing forecasts, such as those from ANZ Bank, which anticipates the 1-year rate will continue to rise to 7.1% sometime this year before descending to about 6.0% by year-end, reveals minor discrepancies but a similar directional flow.
The future of interest rates, while shrouded in some degree of uncertainty, is fundamentally grounded in historical data and current economic indicators. The long-term average for interest rates, the Reserve Bank’s future OCR plans, and the current economic climate all play pivotal roles in shaping these forecasts.
While interest rates have experienced a steady climb, reaching peaks not observed since before the 2008 Global Financial Crisis, the anticipation, grounded in both historical data and current economic indicators, is a gradual retraction of these rates over the coming years. For property investors and homeowners, this presents a scenario where strategic financial planning and astute decision-making become paramount in navigating the ebb and flow of the financial tide.
