Reserve Bank decision a relief for homeowners

The Reserve Bank of New Zealand’s announcement that it will hold the official cash rate (OCR) at 5.50 percent is a welcome relief for many homeowners who are feeling the pressure of their increased mortgage repayments.

Despite some economists warning that the OCR could head towards six percent in 2024, the Reserve Bank’s outlook in its February Monetary Policy Statement is now below its last announcement in November 2023. Further increases are unlikely as the Reserve Bank expects the OCR to remain around its current level for an extended period to get inflation back within its one-to-three-percent inflation target. The expectation is that inflation will return to the two percent target midpoint later in 2025, a glimmer of hope for homeowners navigating the challenges of rising prices and interest rates.

The OCR announcement follows the release of Statistics New Zealand’s household income and housing-cost statistics for the year ended June 2023. The average cost of housing per week increased 14.5 percent, from $369.50 to $423.20. For every $100 of disposable income, New Zealand households spent an average of $22.32 on housing costs. This is a 7.4 percent increase from $20.79 in the year to June 2022. 

Average weekly expenditure on total mortgage payments increased by 27.5 percent, from $475 in the year ended June 2022 to $605.60 in the year ended June 2023. While mortgage principal repayments remained unchanged from the previous year at $307.90, the impact of the Reserve Bank’s OCR increases, which went from two percent in July 2022 to 5.5 percent in June 2023, can be seen in mortgage interest payments, which increased by almost 50 percent from $207.90 per week to $311.60. Highlighting the extent of the impact interest rate increases have had on housing costs as the Reserve Bank fights inflation.

In addition to the increase in mortgage repayments, homeowners have also faced an increase in insurance costs and local authority rates. In the 12 months from July 2022 to July 2023, building-related insurance costs increased from $40.70 per week to $46.40 (up 14.1 percent). Meanwhile, property rates increased 5.9 percent to $68 per week, up from $64.20 in the year to July 2022. Property rates are set to continue to increase, with some local authorities proposing double-digit rates increases for a second consecutive year.

As costs increase, so does mortgage stress, generally defined as spending 30 percent or more of your household income on servicing your mortgage. As housing costs reach 40 percent or more of a household's income, it becomes more likely that a household will find it difficult to meet other everyday expenses, particularly for low-income households. In the year ended June 2023, 13.3 percent of households that owned or partly-owned their dwelling (including dwellings held in a family trust) were spending more than 40 percent of their income on housing costs. This was an increase of 2.6 percentage points from 2022. 

Despite the good news for homeowners, the Reserve Bank had bad news for renters. While strong immigration has been beneficial in addressing labour shortages, it is continuing to increase demand for rental accommodation. In 2023, after a record year for migration, New Zealand saw a net gain of 126,000 people. The Reserve Bank noted in its announcement that “the demand effects of strong population growth are apparent in increasing pressure on rents.”

This increase in rental costs has seen the number of households that did not own their dwelling and are spending more than 40 percent of their income on housing costs increase by 3.4 percentage points to 27.5 percent.