If you were hoping for mortgage relief this year you might be "sorely disappointed", according to leading economists.
It's a story well known for many New Zealand homeowners, anxiously checking and then rechecking the major banks' interest rates and hoping they will drop before your mortgage is up for renewal.
If you have a mortgage, it's probably gotten much more expensive in the past few years and you're likely finding it uncomfortable.
Over the past three years, Kiwis have been rolling off historic lows of below 3 percent onto sweat-producing rates of 6,7 and 8.
It might not sound like much but for some it's thousands of dollars more a year and it takes a toll. The number of homes being put on the market is increasing and buyers are drying up. Times are tough and as inflation slowly drops, many are keenly waiting [and hoping] interest rates follow.
After the pandemic, experts were widely predicting mortgage relief would start coming through late this year. But while inflation is dropping, it's moving slowly and is still well outside the target range. The latest unemployment data was also lower than expected, which paints a picture of slow, steady decreases, not instant relief.
Infometrics chief economist Brad Olsen said the Reserve Bank of New Zealand has been burnt by consistently high inflation and any Official Cash Rate changes will be extremely cautious.
"I think anyone who's expecting a short, sharp, quick resolution to these challenges is going to be sorely disappointed in 2024," Olsen told Newshub.
The best-case scenario is a small decrease in August but no change this year is also completely possible, he said.
This is based on expectations that inflation will just sneak below the 3 percent target by the end of the year.
It's currently sitting at 4.7 percent, but Olsen said it's tracking in the right direction, and he believes it will drop back into the target range by late 2024.
"Most expectations are that the next set of inflation numbers for the March quarter that we are currently in, when published in April, could well be around that sort of 3.9 percent mark. So, moving in the right direction," Olsen added.
But battling inflation has taken longer than expected and the Reserve Bank is going to be very hesitant to do anything that might change that.
"Everyone's trying to find the Goldilocks zone. From the Reserve Bank's point of view, they don't feel like they have to continue to push the brake hard or pull up the emergency brake. But they're not confident yet to stop pushing on the accelerator. They don't want to slide off the edge of the road, so they are trying to stick the landing."
When will interest rates drop?
There is a silver lining to all the doom and gloom – interest rates are much more likely to stay the same or drop than increase.
CoreLogic chief economist Kelvin Davidson said there is almost no chance of interest rate increases this year because people are already under immense pressure.
Davidson is also expecting a slow steady decline in interest rates, which will likely stabilise around 5.5 percent. He added that sub-3 percent interest rates were a pandemic outlier and people shouldn't expect to see them again.
"I think the central scenario has to be that it's a steadier pace in decline than what we saw during the pandemic when mortgage rates just collapsed - that was a unique period of time," he said.
Both Olsen and Davidson believe when the Reserve Bank does start cutting the OCR it's going to be smaller than people hope.
"Even if you do see a bit of a change from the Reserve Bank, it's not going to be massive. It's not going to be huge; it's not going to be swift. It's going to be a slowly but surely approach. You might not see a lot of changes," Olsen said.
The Reserve Bank's been clear that it's not comfortable bringing them down yet, equally, it's not comfortable with needing to raise them further. So, they're comfortable sitting on their hands for the moment and that seems to be likely the tone for most of 2024."
Jumping at shadows
Olsen said some of the excitement over potential relief this year was driven by people "jumping at shadows" and swinging from one extreme to the other, despite the RBNZ taking a very consistent tone.
"I think the challenge is that at the end of last year, the Reserve Bank was still pushing a fairly, worried tone around inflation, and that was completely appropriate.
"It's just through December and then into January, financial markets went into a bit of a tear. They were overzealous. They were picking up the wrong trend from data and saying there would be massive cuts through 2024, and it was all on when it came to interest rates.
"They've sort of been punished back into submission by the Reserve Bank. The RBNZ's sort of said, 'Look, we've got a plan, it's working, we're going to stick with the plan around interest rates'. That plan would see interest rates remain around the level they are into 2025," Olsen added.
Recent tinkering is mostly market pressure
The news relief is some way off may come as a surprise. Especially after two major banks decreased some of their mortgage rates this week.
But Davidson said those changes are reflective of stiff competition between banks, more than pricing in anticipated OCR decreases.
This is because as fewer people buy, banks are getting fewer new mortgages and are working to retain their customers and even poach from their competitors.
He added banks will also be trying to ease pressure on their existing borrowers where they can.
"People are repricing their loans and they might have started off at 2.5, and they've gone through a couple of cycles of facing higher interest rates. They might be up at 5.5 or 6 percent fixed now.
"So, there's a bit more pressure. We know that people can switch banks so that is an incentive to keep your mortgage rates as low as possible to keep those existing customers from going somewhere else. New borrowing is also quiet so if you can get a few more new lines in the door, that's good.
Davidson added those competitive pressures are mostly independent of OCR changes so while banks might continue to tinker, large drops are unlikely.
This all means borrowers should get comfortable being uncomfortable because they're unlikely to see any substantial changes any time soon.
What is expected in 2025?
While there might not be much movement this year, Davidson expects interest rates will steadily decline next year.
"The general feeling is normal would be in the 5 top 6 percent range deepening on the term you choose and your exact economic circumstances but that's sort of where we are headed over a two-year horizon," Davidson said.
It's a view echoed by Olsen who predicts steady but small declines in 2025 assuming inflation tracks down how it is expected to.
"I expect most households will be waiting, watching and worrying because most people who've got a mortgage certainly recently will be uncomfortable, extremely uncomfortable.
"They will be looking for a bit of relief and I think the message is even when that relief does come, it might take a while. That relief is not going to be large and it's not going to be immediate."
