Interest rates with a four in front not far away – Squirrel

Squirrel Mortgages founder John Bolton says unfortunately, it hasn’t happened this side of Christmas, but assuming things go as expected next year, mortgage rates should be below 5% — probably between 4.8% to 4.9% — sometime in March or April.

He says it is important for borrowers to temper their expectations around what a “good” rate looks like, because they are unlikely to get back to the same low rates of under 3%, in some cases, during Covid any time soon.

“In this environment, once borrowers start to see rates with a four in front of them, they’re getting a pretty good deal.”

Meanwhile, Kiwibank is forecasting another 1.25% of OCR cuts by the RBNZ next year. That will come from a 0.50% cut in February, from 4.25% to 3.75%, followed by a 0.25% decline in April.

Kiwibank chief economist Jarrod Kerr says the RBNZ may pause in May at 3.5%, but he expects another two 0.25% cuts to 3% during the year.

“The RBNZ in forecast a perplexing pause at 3.5% well into 2026,and only get the cash rate down to 3% by the end of 2027. Why wait? It shouldn’t.”

Bolton says short-term rates are likely to be the best bet for borrowers over the next little while, Bolton says. They are largely dictated by what’s happening at a domestic level—reflecting drops in the OCR, for example — while longer-term rates are much more influenced by what’s happening overseas, specifically in the US.

Longer-term rates are expected to track higher, at least in the near future, as a result of Trump’s re-election — with his planned introduction of a variety of different trade sanctions expected to have an inflationary impact on the global economy.

“It’s going to be interesting to watch how things play out on that front once he’s back in the White House from late January.”

Bolton says falling interest rates are obviously good news for borrowers, but it’s going to take some time for the benefit of that to filter through to the business sector.

“The last couple of years have been nasty — eating away at people’s savings, households and businesses alike, and doing real damage to their balance sheets.

“Even as consumers start to feel the relief of further rate falls, it’s not going to be this big catalyst for people to rush out and start spending money, making significant purchases. The number one priority for the next little while is going to be on rebuilding their finances.”

He says “Thrive in 2025” has been the new rallying cry in recent months, but the reality is that next year is going to be a bit of a mixed bag for businesses. Hospitality and local tourism, for example, should hopefully get a bit of a boost over the summer holidays, but for others, it’s still going to be a real slog.

House prices

House prices are expected to recover over the course of next year.

Most economists are picking between 5% and 7%, but that (s to Bolton feels a little optimistic.

Auckland and Wellington prices are still down about 15% from the 2021peak in dollar terms and somewhere between 25% and 30% once inflation’s factored in. “So, we’re not talking growth as such, we’re simply talking a partial recovery.”

Progress will come in fits and starts, he says and different parts of the market will bounce back to different degrees, depending on things like buyer demand.

Kiwibank’s Kerr says falling interest rates is one tailwind for the housing market.

The return of the investor is another. First-home buyers remain active participants in the market. Atypically, more bank lending is going to first home buyers than investors.

“However, we are seeing and hearing of a lift in investor activity, off a very low base. We expect this segment of the market to be more involved next year. “

He says beyond lower interest rates, changes to investor policy – including the reintroduction of interest deductibility, reduction of the Brightline test holding period, and an easing in LVR restrictions – lowers the hurdle for investors.

“An improvement in rental yields should also entice investors back. While rental inflation has started to ease, rental yields have lifted and remain at about 3.9%. As term deposit rates decline, rental yields will become more attractive to investors.”

Before any panic sets in about the return of investors, Kerr says it should be noted that investors get an unreasonable amount of blame for New Zealand’s housing affordability. In reality, Kiwi housing affordability stems from one issue alone - a lack of supply. “We need the return of investors and developers if we’re going to tackle the issue at its heart.”