The long-awaited moment has arrived, and it's some good news for Kiwi borrowers. The Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) by 0.25% on 14 August. This means we will finally start to see a gradual drop in interest rates over the next few months.

There was a lot of speculation leading up to this announcement about what the decision would be. Word on the street was that interest rates would fall by the end of the year, but there was little certainty around when this would happen, and the August drop actually came a bit earlier than some expected - but it’s welcome news for many. According to the RBNZ’s updated projections, we can expect two more OCR cuts totaling 0.5% by Christmas and an additional 1% reduction in rates throughout 2025. 

Annual inflation is expected to fall nicely within the 1%-3% target range by October. This would mean the official cash rate (OCR) would be in a "neutral" zone, which doesn’t push the economy either way. So, interest rates are likely to eventually settle around 4.5%-5%, but they might drop a bit below this if there’s a need to give the economy a boost.

But what does this OCR drop mean for the housing market? 

Well, we don’t expect it to have a huge impact right away. It’s more of a mindset change than anything, a sign that we’ve weathered the worst of the storm and sunnier skies lie ahead. A lot of people have been doing it tough these past couple of years and both businesses and families have chewed through their savings, which has led to a lot less disposable income and a huge change in spending habits, which in turn has led to reduced economic activity. So it’s unlikely that we’ll see a radical shift in the market, but it could create more of a balance between buyers and sellers. Some economists speculate that we may see a bit of recovery in house prices over the next year as well (not a rise, but a recovery from the fall they’ve recently taken back to where they were), but they also acknowledge that it’s going to take people a while to recover financially from the last few years. 

To put the implications of the OCR drop in perspective for you, let’s say you have a $700,000 mortgage on a 28 year term, a 1% drop in interest rates (from 6.99% to 5.99%) is going to save you $452 a month. So it’s not enormous, but every bit helps. And to be fair, with the rising cost of living that $452 is probably going towards essentials like groceries or petrol, or to rebuild depleted savings, but hey it’s a start. It’s important to note in situations like this that recessions last many years and economies take time to recover, so it’s very unlikely that we’ll see things turn around right away. We can however acknowledge that this is a step in the right direction and potentially the beginning of a slow recovery.