NZ Interest Rates Prediction 2020 (Historical Archive)

Every year I have a crack at predicting where interest rates and the housing market are headed. Some years I get close, other years the market makes me look foolish. This was the year the market made everyone look foolish, but here is what I was thinking at the start of 2020 before COVID-19 rewrote the rules.

Reviewing the 2019 Predictions

Before getting into 2020, let me own up to how the 2019 predictions played out. On interest rates, I had predicted rates climbing towards 4.49%, but the actual discounted one-year fixed rates landed around 3.39%. That was a clear miss - rates moved in the opposite direction to what I expected, driven by a more dovish Reserve Bank than I had anticipated.

On property prices, the scorecard was better. I called Auckland as flat at 0% growth, and actual figures came in between 0.4% and 1.7% depending on whose data you used - close enough. Wellington I predicted at 7.1% growth, with actuals landing between 5.0% and 6.7%, so within range. Christchurch I called at 2% growth, with actual results between 2.1% and 4.2%. Two out of three on property was a decent hit rate, even if the interest rate call was well off the mark.

Where I Thought Rates Were Heading in 2020

My prediction for 2020 was that the most common one-year discounted fixed rate would sit around 3.5% by December 2020. At the time, I felt rates had more room to move up than down, and wrote that it seemed more likely rates would drift towards 5% rather than 2%. I also hedged by saying we might briefly see rates dip below 3% at some point during the year.

In hindsight, the "below 3%" call turned out to be the accurate one, though not for any reason I had anticipated. The pandemic triggered emergency monetary policy action that pushed rates to historic lows. By late 2020, one-year fixed rates were well under 3% and heading lower still. The lesson here is that black swan events can render even well-reasoned predictions meaningless overnight.

Housing Market Predictions for 2020

For Auckland, I expected roughly 5% price growth, give or take 1%, with rents rising about 3% in line with inflation. Auckland had been flat for a few years at that point and I felt it was due for a modest recovery as the foreign buyer ban effects washed through and supply constraints started biting again.

Wellington I was most bullish on, predicting 8% growth. The capital had been running hot for years, supply was chronically short, and building consents were only just starting to catch up. Demand from government sector employment and the general appeal of inner-city Wellington living showed no signs of slowing down.

Christchurch I called at 5% growth, noting the city was overdue for a jump. Post-earthquake rebuilding had largely wrapped up, the city centre was revitalising, and prices still sat well below Auckland and Wellington on a per-square-metre basis. It felt like Christchurch offered genuine value for buyers willing to look south.

First Home Buyers in 2020

At the time of writing, the Reserve Bank had been gradually relaxing LVR restrictions on first home buyers, which was helpful, though banks had simultaneously tightened their servicing test rates. The net effect was a bit of a wash for many buyers - easier to get approval on paper, but the affordability calculations remained tough.

I was vocal about the need to update the government's HomeStart grant limits and First Home Loan caps, which at that point had not been adjusted for over six years despite significant house price increases. A $550,000 price cap in Auckland was increasingly unrealistic when the median price sat well above that figure. These caps were eventually updated, though it took longer than most of us in the industry would have liked.

What Actually Happened

Of course, none of these predictions accounted for a global pandemic. By March 2020, New Zealand was in lockdown, the OCR was slashed, mortgage holidays were introduced, and the property market entered a period of extraordinary volatility followed by extraordinary growth. The 2020 and 2021 boom that followed made even the most optimistic predictions look conservative. It is a useful reminder that predictions are educated guesses at best, and the world has a habit of throwing curveballs that no amount of analysis can foresee.