Interest Rates Drive House Prices - But How Much?

Interest Rates Drive House Prices - But How Much?

House prices rise and fall for many reasons.  But if there’s one factor that dominates house price cycles - mortgage rates.  Approximately 60% - 70% of house price growth can be attributed to mortgage rates.  Other factors, such as population growth, housing supply and household incomes, play a minor role.  

A breakdown of how short-term mortgage rates typically affect house prices in New Zealand is provided below.  As a simple rule of thumb, mortgage rates of 5% or below lead to moderate to strong price growth.  
Conversely, mortgage rates of 6% or more lead to minimal or negative growth.  

Mortgage rates are currently at around 5% and are expected to drop slightly over the next year, and then remain at that level for 1-2 years.

The RBNZ OCR is forecast to decrease to 3% by 2026 and then remain constant through until 2027.

This indicates house price growth of 5-10% over the next 1-2 years.

This aligns with various bank expectations and market commentators, for e.g.  ANZ, BNZ and Kiwibank, forecast house price growth of 6-7%.  Tony Alexander, an independent economist, forecasts house price growth of 6%, whereas CoreLogic expects a moderate 5% growth.