The outlook for interest rates, the economy, and the housing market has changed quite a bit over the past two months as a result of the Reserve Bank’s easing of monetary policy. After warning in May that they might need to raise rates again and did not contemplate any cut until August 2025 they moved on August 14 to cut the cash rate 0.25% to 5.25%. They project that come the end of 2025 the rate will be near 4% and a year later near 3%

In response to the shift in monetary policy fixed mortgage rates have fallen about 1% and I can see from my monthly surveys that there has been an immediate impact on sentiment. Whereas three months ago a net 42% of people were saying they planned cutting back on their spending, now that is just 13%. That is still negative and retailers will continue to experience pain well into 2025. But the shift has come at twice the speed of a similar confidence improvement last year which reversed quickly early this year.

A net 42% of real estate agents now tell me that they are seeing more people attending open homes. Two months ago a net 35% said that fewer people were out and about. A net 43% say they are seeing more first home buyers from a net 3% seeing fewer two months back. And a net 25% are seeing more investors compared with a net 24% two months ago seeing fewer.

These changes in measures of how we feel and what we are seeing are strong – but perhaps a bit too strong. There are still some big challenges left for the NZ economy which won’t prevent a return to near 2% growth through 2025, but will limit the strength of the recovery. Many firms are still going to get weeded out because of weaker than needed demand and still rising costs.

One factor constraining the upturn will be the absence of a key factor which drove the recovery from the regions in the recoveries after our previous three recessions – a
large fall in the NZ dollar. No large rise happened during this cycle’s tightening phase so no large currency decline is now set to occur. In fact, since August 14 the NZ dollar has risen over one cent against the US dollar.

Feelings of job security have declined and as the unemployment rate climbs above 5% such worries will tend to suppress some household spending. With regard specifically to the housing market, we are probably right now at the bottom of the price cycle. Gains are likely on average now for the next four years or so. But the strength of price rises will be limited by interest rates probably not falling quite as far in the next 2-3 years as people are currently thinking. Businesses are still under pressure to raise prices.

Also, some older investors are selling their long-held properties and looking for other assets to assist with funding their retirement which has just been made surprisingly more expensive by hikes in insurance and council rates. The net migration numbers are falling away very rapidly, the introduction of DTIs – debt to income restrictions – and listings sitting at their highest levels since 2015 mean buyers are unlikely to display the sort of FOMO needed to cause especially sharp increases in prices.

Nonetheless, the cycle is turning, sighs of relief are audible throughout the country, and most business operators and property owners can look forward to better times, even though the upturn will arrive at different times for different groups over the next 12 months.

This article has been provided for general information only. Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called "Tony's View". You can sign up at www.tonyalexander.nz