A New Year, A New Economy?

“It is the Economy stupid”

James Carville (1992)
(Bill Clinton’s political advisor)

The New Year is well underway, with our first OCR reduction having come through in February, plus lots of noise coming from Politicians as their New Year begins. The most recent polls indicate that 50% of people surveyed think the Country is going in the wrong direction, which are being pushed by the press as discord within the Coalition. However, if you ask someone that question, those on the left of a right-learning centrist Government will say no, as will those who are right of centre. The Economic repair job that the current Government has had to undertake will take most of their term to start to bear fruit, with people’s views on the Coalition being led by their own view of our Countries and their own current Economic state, and the press has a large effect on people’s views of this.

They decry the fact that unemployment will rise to over 5%, however our historical average is 5.74 %, as measured between 1985 and 2024. People also view mortgage rates as still being abnormally high, at the current main Bank floating rate offering of around 6.5 %, however the historical average, from when measured in 1998 to now is 6.9%, with a maximum reached in June 1998 of 11.2%. People still remember the historical lows of the Covid era, but it is unrealistic to expect mortgage rates to get down to those levels again, with commentary that a 3–5-year rate of under 5% would be worth grabbing. There is some disagreement by economists as to when mortgage rates will drop to the lowest point of this cycle, as the quickly changing offshore environment influences our lending rates here.

The other issue effecting our economy and how far down interest rates track is the Trump administration, as the US dollar has appreciated considerably since he got into power, meaning interest rates have been firming in the United States, which influences our longer-term fixed rates. The depreciation of our currency is providing healthy returns to dairying, forestry, sheep and beef exports and presumably will flow through into increased tourism.  As with most economic recoveries there will be some regions that experience an earlier and stronger recovery, whilst others lag.

In this case it appears those regions with a rural base will benefit the most, while the main centres will lag, with Wellington in particular taking a while to experience any uptick. It will however drive inflation here, but the Reserve Bank tends to be more concerned with domestic inflation, as the OCR can’t influence events offshore. The rhetoric from the Reserve Bank at the recent OCR cut now points to the OCR continuing to reduce in the first half of 2025, unlike most economists’ predictions that there will be a lull after the February announcement, and also that the OCR will get down to around 3.0%, as opposed to predictions of 3.25%.

This hopefully will help stimulate a very sluggish economy, however there is still some underlying inflation, particularly from some dairy products and within the electricity markets. These underlying issues, our falling currency, and the current uncertainty around the World, created by Trump’s policies and the war in Ukraine and unrest in the Middle East, could mean the OCR doesn’t drop as low as predicted. The effect the new President has had on the financial and geo political world in just over 1 month in office leaves us to worry as to what will happen over 4 years. The main Banks are managing to obtain larger than normal operating margins, which will only be reduced if they trade some of these off for increased market share. We are at least now starting to see some promotion of “Special” rates in the medium to longer term fixed rate market as they look to lock customers in.  The concern for the Banks is that the majority of their mortgage book is currently sitting on floating rates, which is obviously the most fluid, though the Banks already appear keen to offer discounted rates for the business they want to retain or obtain.

Most of the non-Bank financiers experienced strong activity prior to Xmas, and slow demand in January ’25, which appears to be picking up now. They appear to in the main be sitting on good levels of liquidity and are actively seeking transactions, with the view that we are past the lows from a property pricing and activity viewpoint. The recent interest rate reductions are also flowing into their pricing parameters as the competition within the market means they are forced to negotiate over interest rates and fees charged to obtain the business. Global has also had a number of funders contact us to advise that they are looking to expand their loan books over 2025, which should lead to a stronger ability to negotiate, as funders compete in the same market. As always though, most of these financiers have a sweet spot-size, location, type of facility etc.

This said, we do have access to good levels of funds looking for a home, so should you or your clients need assistance, please don’t hesitate to contact us.