Interest rates could drop, house prices increase as people age

Banks’ lending and funding may be impacted. Deposit funding may increase, while credit demand for housing could decline.

If demand for housing loans declines, banks may increase other types of lending or expand provision of other services, such as wealth management, the briefing paper says.

By 2050, nearly a quarter of the population is expected to be aged 65 and as retirees begin to draw down on their savings, this may put upward pressure on interest rates and downward pressure on house prices, the RBNZ says.

This dissaving may include selling houses, putting additional downward pressure on prices.

The types of housing demanded may also change as the population ages. Older households may prefer single storey dwellings, or smaller properties.

Slower growth in the working age population will lower growth in demand for larger houses.

These changes could affect the composition of new housing construction, the RBNZ says.

And as life expectancy increases, older people may become more inclined to explore other options to ensure a stable flow of income during their retirement, such as reverse mortgages or annuities.

Unlike a standard mortgage, a reverse mortgage does not require regular payments. The loan and the accumulated interest are repaid when the borrower moves out from their home, either to move into long-term care or if they die.

Most New Zealand banks do not offer reverse mortgages, and the market is dominated by two providers, with about $1 billion in loans outstanding in mid-2024. For comparison, the total value of housing loans is about $360 billion.

Steady income

The RBNZ says as the population ages older investors are more likely to invest in lower risk assets, such as term deposits, or switching from higher risk to lower risk KiwiSaver funds.

This is due to the need for a steady income stream and to protect against having to sell assets at a time when prices are low.

Individuals do not know how long they will live and need a reliable source of income to support them.

“For this reason, savings may shift out of riskier investments, such as equities, and into safer investments. However, low interest rates may reduce returns, encouraging investors to undertake riskier investments to achieve higher yields,” the central bank says.

Less need to borrow

An ageing population could also impact banks’ balance sheets as deposits increase and demand for credit declines.

Older bank customers have less need to borrow as they are more likely to own their houses outright and are less likely to start a new business than younger bank customers.

Consumption preferences may also shift away from goods and towards the services sector as individuals get older, further reducing the need for credit.

Both the rise in deposits and drop in credit demand should reduce banks’ exposure to volatility in global funding markets, the RBNZ says.

Future direction

There is considerable uncertainty about the direction of future changes in the neutral interest rate. If the neutral rate does decline, this may make it harder to provide enough stimulus through OCR cuts in situations where expansionary monetary policy is necessary.

As a result, the probability of having to use non-traditional monetary policy tools, such as large-scale asset purchases, in a business cycle may increase.

Monetary policy transmission channels to the economy may also be impacted by an ageing population.

Older people are more likely to have paid off their mortgages and are less likely to be in employment. This means that the negative impact of tighter monetary policy on household cashflow will be smaller.

As net savers, higher interest rates are likely to have a positive impact on older people’s incomes rather than a negative impact.

However, older individuals will still be impacted by the effect of interest rate changes on asset prices, so monetary policy transmission may operate more through the wealth effect
channel. Their decisions on when to spend will also continue to be affected by interest rates, the RBNZ says.

System risks

While population ageing may create risks to the financial system, any vulnerabilities are likely to develop slowly, the RBNZ says.

Monitoring longer- term indicators such as fiscal imbalances, household asset allocations and trends in sectoral credit demand will be important for analysing the impact of an ageing
population on the financial system.

“If significant vulnerabilities develop, we will assess the potential impact on the financial system and consider whether changes to our prudential policy settings are needed. “