Residential housing loan rates

IBISWorld forecasts residential housing loan rates to drop by 0.07 percentage points in 2024-25, to 8.47%. The RBNZ decreased the Official Cash Rate (OCR) in August 2024, the first rate cut since March 2020. Easing inflationary pressures will likely encourage the RBNZ to bring the cash rate lower, which is expected to reduce residential housing loan rates in 2024-25.

Residential housing loan rates have risen over the past five years, primarily due to tightening monetary policy. Prior to October 2021, the OCR was very low in line with global trends. However, fears of an overheating residential property market led to higher residential housing loan rates in 2018-19, as banks tightened their lending standards. The RBNZ placed limits on the proportion of high loan-to-value ratio (LVR) lending that banks can issue to reduce the risks posed to the financial system. These restrictions were gradually relaxed starting 1 January 2018 as the housing market moderated. In May 2020, the RBNZ temporarily removed LVR restrictions to facilitate greater lending to households and provide support to the economy during the pandemic. However, the LVR restrictions were reinstated in March 2021 and further tightened in May 2021 and November 2021, as the housing market and new mortgage lending rebounded from the pandemic.

Residential housing loan rates initially declined on the back of cuts to the OCR in May and August 2019 due to concerns about a slowing economy and below-target inflation at the time. The OCR has been the primary basis on which the cost of funding for banks is calculated. However, banks have increasingly switched to more long-term sources of funding, like deposits, which has led to a wider spread and more volatility between residential housing loan rates and the OCR. From October 2021, the RBNZ lifted the OCR incrementally in response to increased inflation globally. The RBNZ continued to lift the OCR over the past three years to 2023-24, partly due to persistent inflationary pressures. This policy led to higher residential housing loan rates over the past few years. The use of macro-prudential tools to reduce housing prices towards more sustainable levels also led to tighter lending standards in 2023-24, which increased residential housing loan rates. Overall, IBISWorld forecasts residential housing loan rates to rise at an average annual rate of 0.59 percentage points over the five years through 2024-25.