Since August, the OCR has been reduced from 5.5 per cent to 4.25 per cent, but the extent of its impact on the economy remains uncertain. While some benefits have materialised, broader economic activity is yet to show significant recovery.
Mortgage rates and 12-month term deposit rates have fallen faster than the OCR itself, partly driven by market anticipation of further cuts. For new borrowers, this has provided tangible relief. A typical homebuyer purchasing a median-priced house with a 20 per cent deposit now faces substantially lower annual interest costs compared to earlier in the year. However, the weaker economic backdrop and concerns about job security have dampened demand for new borrowing.
Existing homeowners are also yet to fully realise the benefits of lower interest rates. Average mortgage rates on existing loans even ticked up slightly to 6.39 per cent in October, as many borrowers opted for higher floating rates in anticipation of further reductions. Nevertheless, a record number of mortgages are set to reset to lower rates in the coming months, with average rates projected to fall to approximately 5.7 per cent by mid-2025.
In the housing market, the rate cuts have likely mitigated what could have been a sharper correction in property prices. While the market is showing signs of stabilisation, significant growth remains unlikely in the near term. House prices are expected to recover gradually next year, but the pace will be far from rapid.
The construction sector is facing challenges even as activity is expected to settle 15 per cent below the previous peak in 2021. Rising construction costs, declining house prices, and high interest rates would further constrain growth. However, there is some hope coming from building consents—specifically from standalone houses, which have displayed improvements. One major sign is the soaring residential building intentions that have usually been linked with future consenting activity, and that fills great hopes for a resurgence in the industry.
Not all the news is good, with the retail sector still struggling but it is believed that the sector’s woes have peaked. Three consecutive months of increase in retail card spending is a particular highlight in recent statistics.
While the economy has been fairly steady as of now, there is no forward momentum overall. Although the cuts in rates by the Reserve Bank laid the groundwork for resuscitating the economy, it could be some time before results are visible.
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