Reserve Bank’s ‘scorched earth’ incinerates New Zealand’s housing market

Interest.co.nz’s David Hargreaves has woken in fright at the prospect of the Reserve Bank of New Zealand (RBNZ) hiking the official cash rate (OCR) to 3.9%, as outlined in its ‘forward track’ guidance attached to the RBNZ’s latest Monetary Policy Statement:

According to RBNZ figures, as of April there was nearly $297 billion worth of fixed-rate mortgages around the country. Of this, $239 billion (just over 80%) was due to reset within two years. Well over half of the money ($160 billion) was due for a reset within 12 months.

These rate rises are carrying enormous firepower.

A quick example, using the trusty interest.co.nz calculator: In May last year the average-sized new mortgage (according to RBNZ figures) was $329,000. So, using the Kiwibank rate of 2.35% on a 30-year mortgage would have meant payments of $1274. If this imaginary customer were to today reset this mortgage for another year they will be paying $1736 a month. That’s a rise in payments of 36%. On a weekly basis it would mean over $100 EXTRA a week.

The RBNZ has suggested that even the short-term fixed mortgages are heading for 6%. On that basis our mortgage customer would then be paying $1973 a month, a rise of 55% on what they were paying in May last year and on a weekly basis some $160 more.

I did an Auckland-esque example using a $900,000 Auckland-sized mortgage as well, but I’ve decided the results were too frightening to detail here. Suffice it to say my sympathies are with the people who will be in that boat…

The economy is going to grind to halt.

The RBNZ’s Monetary Policy Statement (MPS), released a fortnight ago, forecast that average mortgage rates will soar to around 6% next year, which is more than double their pandemic low:

Forecast mortgage rates

Accordingly, borrowers that stretched themselves to get into the housing market at rock bottom fixed mortgage rates face one hell of a mortgage reset ‘shock’ when their fixed loan term expires.

Meanwhile,  Investment and advisory firm Jarden’s latest housing market review tips that New Zealand house prices will crash 25% from their November 2021 peak on the back of aggressive rate hikes:

Average house prices are expected to drop to $720,000 by December 2023, an 18 percent decrease from the current average of $905,000 in April.

The modelling also suggests that housing demand could slow dramatically by the end of 2022.

Jarden research analyst Grant Swanepoel said average house prices peaked at $965,000 in November 2021, which is a 49 percent increase from 2019 when the average house price was just $647,000.

He said prices have since retraced by six percent in April 2022.

“All signs are that they are continuing to fall,” Swanepoel said.

Given the housing market’s over-sized share of New Zealand’s economy, the RBNZ risks plunging the nation into a deep recession if it follows through with its ‘forward track’ guidance.

The RBNZ is walking a very fine line on interest rates and must tread cautiously.

Unconventional Economist
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Comments

  1. “The RBNZ is walking a very fine line on interest rates and must tread cautiously.” or it is simply trying to right the wrongs of the past and get things back to stable and strong.

    • Got a feeling the boys are playing some sort of strategic game here, for both NZ and Aus.

      • Strategy requires intelligence and thought, I don’t think we can apply that in this case to the power that be. Reactionary for me is a more plausable explaination. I believe that both central banks think that using a MA on a chart is a valid trading strategy.

  2. Did they go up 40% during covid?
    But not allowed to drop back to pre covid.
    The greed is strong with this one…..

  3. Hugh PavletichMEMBER

    The reality is that inflation / housing inflation are being dealt with hard and fast internationally … and NZ has largely a self – inflicted bigger issues to deal with than most.

    Consider recent public comments by Jamie Dimon, CEO of JP Morgan … New Australian Fed Treasurer Jim Chalmers … former RBNZ governor Don Brash …

    JP Morgan CEO Screams Economic Collapse | Unseen Interview … Stoic Investor

    https://www.youtube.com/watch?v=JNxhV40aIg4

    Australia Inflation Accelerated Further From 5.1%, Chalmers Says … Michael Heath … Bloomberg / Financial Post

    https://financialpost.com/pmn/business-pmn/australia-inflation-accelerated-further-from-5-1-chalmers-says

    Federal Treasurer issues grave warning about the state of the economy | ABC News (Australia) … Youtube

    https://www.youtube.com/watch?v=lcsSrTtNDq8

    Don Brash says fall in house prices ‘to be welcomed’ … Q&A TVNZ

    https://www.1news.co.nz/2022/05/29/don-brash-says-fall-in-house-prices-to-be-welcomed/

  4. pfh007.comMEMBER

    “..The RBNZ is walking a very fine line on interest rates and must tread cautiously…”

    They will not as they have a job to do and that is to cool inflation driven by excessive bank credit, fiscal policy and a tight employment market. If private bank credit creation tightens too much then fiscal policy is a much better way of addressing it. Especially fiscal policy combined with ending the private bank monopoly over central bank deposit accounts. More central bank deposits paying zero interest and available for loans is a much more effective way of holding down interest rates than using our incompetent fat and lazy bankers.

    But it would have been nice if they paid less attention to the clown army demanding that they try to keep an economy moving with near zero interest rates, exploding house prices and household debt as some pain for some might have been avoided.

  5. I agree. But to add to this it made me think “exploding house prices and household debt as some pain for some might have been avoided.” The word avoided sparked interest, given they selected not to avoid, it then results in pain, hopefully only in the short time.
    While this comment might not be relevant to conversation, it might also be.
    When having my first child, I was cautious and apprehensive about child getting hurt, slamming fingers in drawers. So I installed all the wisbang contraptions to prevent the event of young child crushing fingers when trying to climb the kitchen drawers. Upon telling my mother, how proud I was, that I have taken this precaution, my mother reflected and said, they will only do it once. Upon reflection of this comment, it dawned on me she might be right, NO PAIN NO GAIN, as to speak. Feeling like an idiot, I removed all the finger saving devices from the kitchen. What happened next, my son slammed his fingers in the drawer, screamed and I felt bad as a new father. Did it happen again, not once, he learnt and so did I.
    What relevance does this have to the topic of conversation, for too long the RBA and other central banks have tried to stop people getting hurt, but eventually like all things in life, they will, but having no previous experience with dealing with pain, the pain is magnified.
    Those over indebted need to feel the pince of a draw closing on their fingers, then next time they will make better and more cautious decisions so it doesn’t happen again, until then the drawer just gets bigger, heavier and when closed on finger, the pain is greater.

    • Hi Ben,

      Not sure I accept your idea about children and their “learning” as if that held true we would NEVER made it to upright as after falling over and hurting ourselves we would have thought “Not trying that again. All fours are better than two, who was the idiot who suggested this walking thingy; [email protected] they are!”

      • Hi Denise, no problem, we all have different views on parenting and economics, from my experience my mother was correct, I have a beautiful teenage child who learns and is responsible for his emotion, thoughts and action,he has heart and honesty. Wish the RBA could be the same as my teenage child.

  6. The economy is being torched. A simple model of GDP growth (%y/y) against the ANZ Consumer Confidence and Business Own Activity indicators points to a recession as deep as 1990/91 or 2008/09. That’s also reflected in charts of house prices vs. consumption and a whole range of other indicators.

    Banks have finally woken up to the fact the housing market is in deep trouble, but they are all asleep at the wheel regarding its implications for the broader economy. The RBNZ made the comment that households can smooth consumption by lowering excess savings but the people who don’t have savings are credit constrained and will cut consumption and those with savings will see their assets fall in value and will try to increase savings. Historically, there’s a good relationship between savings and activity, savings rise when activity falls; its a Keynesian world not a Friedmanite one.

    And what’s really troubling for the economy is that the mortgage reset is only just kicking off.

    • pfh007.comMEMBER

      “..Banks have finally woken up to the fact the housing market is in deep trouble, but they are all asleep at the wheel regarding its implications for the broader economy…”

      Really?

      Does anyone seriously believe that the banks and the central banks did not understand the damage that was being done by driving interest rates to zero and inducing thousands of households to enter into massive debt contracts?

      Banking and the conservative economic mainstream knew full well that there were alternatives to clinging to failing monetary policy and private bank credit creation channeled into residential asset prices but chose to ignore them.

      There is no need to torch the economy but that is exactly what the banking and economic mainstream will demand as they simply refuse to imagine the alternative …..a monetary system that is not built around the interests of private banks.

      Now is to the time for reform not yet another exercise in resuscitating the terminally ill.

  7. I doubt there’ll be any scorched earth, just a lot of angry, disappointed people who thought that the game could continue indefinitely; that didn’t sell and are now watching some of their paper wealth diminish, as some sort of sanity return to the property market.
    Yes, there will be collateral damage – many who in all innocence or fear bought a home ‘at the top’ – but their numbers will be relatively small (not that it will be much consolation if you are one of them).
    This is an educational exercise by the RBNZ, as much as it is an economic imperative, teaching Kiwis that ‘property can go down’ after all. They have one shot at doing this, and the time is now, before whatever else that we can’t see in the World arrives on our doorstep.