The Reserve Bank's decision to cut the official cash rate (OCR) by 25 basis points, the first reduction in over four years, has left many New Zealanders with mixed emotions, particularly first home buyers. While the OCR cut is aimed at stimulating the economy by lowering borrowing costs, the ripple effects on the housing market may present a complex scenario for those hoping to buy their first home.
The central bank’s move comes as price pressures begin to cool, with inflation expected to fall back within the target band of 1 to 3 percent by the September quarter. With the cash rate now forecasted to drop to 4.9 percent by the end of the year, further cuts could be on the horizon, potentially in October and November.
For first home buyers, the immediate thought might be that this OCR cut is a welcome relief. After all, lower interest rates generally translate to lower mortgage repayments, making home loans more affordable. However, the situation is far from straightforward.
Alongside the OCR cut, another significant development is at play: the reduction of the bright-line test from 10 years to two years. Under the new rules, property investors who hold onto a property for at least two years will not be automatically subject to a tax on any capital gains they make upon selling. This change is expected to rekindle investor interest in the property market, as it significantly reduces the tax liability on property speculation.
If someone is thinking of selling and buying again to upgrade their property, the next few months are a perfect opportunity, says Nathan Miglani of NZ Mortgages, which has helped hundreds of Kiwi-Indian clients across Auckland, Wellington and Christchurch among other towns and cities.
“Investors will increasingly become active given the OCR cuts and the reduction in the bright-line test,” he says.
The combination of these two policy shifts – the OCR cut and the bright-line test reduction – could create a challenging environment for first home buyers. With lower interest rates, property investment becomes more attractive, potentially flooding the market with investors. These investors, often armed with greater financial resources and experience, could drive up property prices or snap up desirable properties more quickly than first-time buyers can react.
While the OCR cut may indeed ease mortgage pressures for first home buyers, even if only slightly, it also indirectly intensifies competition in the market. The increased demand from investors could crowd out first-time buyers, making it harder for them to secure a property.
This scenario is particularly concerning in regions where housing supply is already tight, as the added competition from investors could lead to price surges, further complicating the affordability crisis.
For prospective first home buyers, the OCR cut is a double-edged sword. On the one hand, it lowers borrowing costs, making it easier to enter the market. On the other hand, it stimulates investor activity, which could push house prices even higher, creating a more competitive and expensive market.