Property Investment
3 min read
Author: Andrew Nicol
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Yesterday, the OCR announcement dropped and, with the Official Cash Rate staying at 2.25%, it looked like nothing had changed.
But don’t let that fool you. The OCR number is only the headline.
It’s the meaty stuff in the reports and forecasts that property investors need to pay attention to.
And that’s what we’re looking at now.
The last set of forecasts came out before the US-Iran conflict, when the world looked a little less messy.
Now, we have a clearer view of where the Reserve Bank’s head is at.
The big change is the OCR track – that’s the Reserve Bank’s forecast for where it thinks the OCR will go in the future.
Back in February, the Reserve Bank thought the OCR might eventually drift up to 3%, but very slowly. As in, around 2029.
Now, they think we could get to 3% by early next year. About 9 months away.
That is a pretty major shift.
It means the Reserve Bank is basically saying: “We haven’t moved the OCR today, but don’t assume we’re staying here forever.”
Mortgage rates usually move before the OCR does, because banks don’t sit around waiting for the Reserve Bank to officially hike.
They price in what they think is coming.
A rough rule of thumb is that the 1-year mortgage rate average sits about 2.25% above the OCR.
So when the OCR is 2.25%, the 1-year rate might be 4.5%, which is roughly where we’ve been.
But if the OCR goes to 3%, add 2.25% and you get a 1-year rate closer to 5.25%.
It’s not a crystal ball. But it is a useful ballpark. And we’re already seeing some 1-year rates creep up again depending on which bank you’re looking at.
This is also what we’ve been expecting at Opes. We’ve already had our financial advisers running your numbers based on about 5%.
That’s our best guess of where things are going.
Usually, when interest rates go up, it’s because the economy is running hot. People are spending, businesses are hiring, wages are rising, and inflation starts getting out of hand.
That’s not what’s happening here.
Right now, the inflation pressure is mainly coming from overseas: oil, shipping, global conflict … all the fun stuff New Zealand can’t control.
Inflation is currently sitting at 3.1%, and the Reserve Bank thinks it could peak at 4.3% in the September quarter before starting to fall back again.
So the Reserve Bank isn’t necessarily saying, “The economy is too strong and we need to smash it.”
It’s more saying, “At 2.25%, interest rates are still giving the economy a bit of a helping hand.”
But if inflation is heading back above 4%, they want to take their foot on the accelerator. It’s not that they’re slamming on the breaks.
The Reserve Bank now expects house prices to grow more slowly than it thought back in February … which makes sense.
But slower doesn’t mean dead.
In fact, the Reserve Bank is still forecasting stronger growth in 2027, with prices expected to rise around 5.7% from mid-next year to the year after.
The key point is that growth probably won’t be evenly spread.
That’s the trap with national house price data. The national average can be flat, while some areas are already moving.
Christchurch is a good example. Prices there are up about 12% since the bottom of the market, averaging roughly 4% growth a year.
So if you bought in Christchurch at the right time, you don’t really care that the national average has been flat. You’re making money.
So when someone says “house prices are flat,” the correct response is: “Where?”
And that’ll be true for next year. It probably won’t be a market where everything rises together. Some areas will move, some will do nothing … and some may still fall.
The OCR is not likely going back to 5.5%. That’s not what the Reserve Bank is forecasting.
They’re talking about 3% by next year, maybe a little higher after that.
But also, who knows?
Because if there’s one thing we know about forecasts, it’s that the next one usually changes.
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.
This article is for your general information. It’s not financial advice. See here for details about our Financial Advice Provider Disclosure. So Opes isn’t telling you what to do with your own money.
We’ve made every effort to make sure the information is accurate. But we occasionally get the odd fact wrong. Make sure you do your own research or talk to a financial adviser before making any investment decisions.
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