New Zealand households brace for 7% mortgage rates

This week has seen two Big Four New Zealand banks – ANZ and ASB – hike their forecasts for the official cash rate (OCR). This followed Monday’s 32-year high inflation print of 7.3%.

ANZ now sees the OCR peaking at 4% by the end of this year, up from their previous high forecast of 3.5%. ASB now sees a 3.75% OCR peak by the end of the year, up from 3.5% previously.

Both forecasts are more aggressive than the Reserve Bank’s ‘forward track’ guidance, which tipped the OCR to peak at 3.9% by September 2023.

Rodney Dickens from Strategic Risk Analysis believes New Zealand mortgage rates would hit 7% under the banks’ OCR forecasts, which would represent a record increase and risks driving the nation into recession:

In the last 16 months the average rate has increased from a low of 3.2% to 5.9% currently, an increase of 2.7 percentage points. If the average rate increased to 7% it would be a 3.8 percentage point rise…

In terms of interest costs faced by borrowers there has already been an 84% increase based on the average mortgage rate in just 16 months versus a 47% rise in almost five years during the last inflation battle. And if the average rate were to rise to 7%, it would be a 119% increase in mortgage interest costs…

New Zealand average mortgage rates

The Reserve Bank and bank economists are way off the mark in assessing the fallout from the OCR hikes delivered already…

None of the bank economists predict anything close to a recession and the Reserve Bank predicts moderate growth in residential building activity despite it being highly sensitive to interest rates. By contrast, the first chart below shows a combined business and consumer survey that predicts an imminent recession or fall in GDP…

New Zealand GDP growth

The outlook for GDP growth is dramatically worse than the Reserve Bank and bank economists predict, as should be no surprise given the scale of the increase in interest rates so far…

In an extremely short period interest costs have risen dramatically more already than was needed to cool inflation last time. Considering this and it taking up to two years for changes in interest rates to impact on inflation, sound judgement points to a need to wait to see what impact the largest increase in interest costs on record will have rather than charge ahead with even more aggressive OCR hikes.

Given the majority of Kiwi borrowers have fixed rate mortgages, the impact of the Reserve Bank’s aggressive tightening is yet to be felt across New Zealand’s economy.

Accordingly, the Reserve Bank is at grave risk of tightening too far, crashing the housing market, household consumption, and the economy.

Unconventional Economist
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Comments

  1. Hugh PavletichMEMBER

    Its ‘crying time’ in the construction industry now … although of course they did nothing to assist in dealing with the structural impediments to the supply of affordable new housing over the past near 2 decades …

    Construction slowdown: New build inquiries drop by up to 80 per cent, more companies could go bust alongside job losses … Carmen Hall … NZ Herald
    … behind paywall …

    https://www.nzherald.co.nz/business/construction-slowdown-new-build-inquiries-drop-by-up-to-80-per-cent-more-companies-could-go-bust-alongside-job-losses/OGVNT6FNNQLBL2NUCEXQOGAGIQ/

    A building industry leader says inquiries for residential new builds have plummeted between 70 and 80 per cent – prompting fears of job losses and predictions some companies will struggle to survive the year.

    Skyrocketing material costs, tougher bank lending, higher home-loan interest rates and soaring inflation, which has hit 7.3 per cent, are being blamed for the massive drop in inquiries.

    Master Builders Association national vice-president Johnny Calley said the slowdown had the potential to “wreak havoc” on the economy.

    Another building company boss based in Tauranga said sales were down to levels last seen in 2008 when the Global Financial Crisis hit and predicted “real hurt” for the sector when house and land packages sold last year were built.

    The Government says it knows construction is “facing accelerating headwinds” and it is working with the sector.

    Calley, of Tauranga-based Calley Homes, warned some residential construction companies that did not respond to the sudden decrease in demand may not survive. … read more via hyperlink above …

    • Hugh PavletichMEMBER

      If John Key had dealt effectively with the structural impediments to the supply of affordable new housing following the 2008 election as promised, the construction sector would not be the poor performing 20% inflationary shambles it is today …

      … Going back to John Key and the 2007 / 2008 era …

      Video interview with John Key 2007 on housing affordability

      https://www.youtube.com/watch?v=cWPgoAI1cLE&t=2s

      John Key 2007 speech on housing affordability to the Auckland Branch of the New Zealand Property Investors Federation

      https://www.nzpif.org.nz/news/view/53038

      Just after the 2008 election won by National and at the time of the release of the Annual Demographia International Housing Affordability Survey late January (with the Introduction by Dr Don Brash) then Housing Minister Phil Heatley had this to say …

      Bringing better balance to the housing market … Phil Heatley … Beehive

      https://www.beehive.govt.nz/release/bringing-better-balance-housing-market

      For further background reading of the issue from that era … access by scrolling back through the years …

      Hugh Pavletich – Scoop InfoPage

      https://info.scoop.co.nz/Hugh_Pavletich

      Please do check out all the IPSOS NZ Issues Monitors over recent years … which again … should have made it crystal clear to the politicians and public service what the publics REAL CONCERNS are … and conversely … what doesn’t concern them.

    • I can’t put it any better than Hugh;

      If John Key had dealt effectively …. following the 2008 election as promised, the… sector would not be the poor performing… shambles it is today …

      Perhaps I can, in the name of fairness:

      “If Jacinda Ardern had dealt effectively …. following the 2017 election as promised, the… sector would not be the poor performing… shambles it is today ”

      Politicians can’t resolve an acknowledged problem, so the RBNZ looks like it has the courage to do it for them.

    • Hugh PavletichMEMBER

      Thanks Janet. You are very fair !

      It could have been sorted the easy way out of the ’08 election … but sadly it has to happen the hard way … with the politicians having lost credibility and control and the market now brutally sorting it out.

      The ‘market’ of course being the people themselves … as they take whatever steps are necessary to avoid becoming bubble victims.

      The RBNZ’s primary role is to keep inflation between 1 – 3% … not the housing market.

  2. Strange EconomicsMEMBER

    Easy to save the building indusry –
    Can’t they just build stadiums in NZ just like NSW?
    4 more new stadiums coming in NSW at $ 700 million or they could have built 56000 social and affordable homes at half mill.
    Which will benefit the working class more?

    56000 new affordable homes would ruin sales of overpriced new houses.

    Or just knock down the perfectly good stadiums and rebuild them for 2 billion, thats the NSW style.

    • Arthur's Poodle

      They could put a bit more money into Christchurch’s earthquake reconstruction.

  3. Rodney is a long way behind the 8 ball.

    Hes right that the local bank economists, including the RBNZ, initially forecast almost no correction in house prices, then they forecast larger corrections and now they persist in the fantasy that it won’t cause a recession. But we’ve been talking about this here since December.

    Thw argument on excess savings is a nonsense. Economics is determined at the margin, not the average, and NZ has shown time and again that savings behaves in a Keynesian fashion, rising in recessions. It will do so again. Simple budget calculations show that FHBs are in deep trouble and the full recourse mortgage system ensures banks are first in line to be paid. So consumption gets torched.

    What’s concerning is the relationship between gross fixed capital formation, investment intentions and profit expectations. Investment intentions point to a major slowdown in investment spending- way worse than the RBNZ forecasts – and profit expectations are dire. If investment intentions fall to profit expectations, as they are Iikely to do, rhen we will see a deep recession as both consumption and investment tumble. I cant see that being avoided given the RBNZ.

    And on inflation; yes surveys of CURRENT inflation expectations are elevated but long run is not. And if tou look at inflation its nearly all food, petrol, and new dwellings. Wholesale food prices have recently collapsed, petrol prices are down from their highs and stabilising, and new dwelling prices track existing house prices and we should see that fall hard soon too.

    So the RBNZ is making a colossal FK up.

    But why am I not at all surprised????

    • The Travelling PhantomMEMBER

      Indeed, no surprise there, great comment 👍
      Very interesting point when you said it’s the margin not the average what is needed to be looked at.
      RBA in today’s and yesterday’s speeches was focused on averages

      • Not sure what you expect? To say “oh, sorry lads, our bad! We were looking at averages, when we should have looked at you marginals”? You all are under the impression that they really believe what they are saying! No, they don’t give 2 excrements about that, it’s all kabuki! It’s all show! It’s all smoke and mirrors… they know full well what they are doing and sure as hell they’re going to do it. The rest of it is just plausible deniability post-hoc rationalization to feed the press and the dumb masses…

        • The Travelling PhantomMEMBER

          Indeed,
          Was trying to say that , but mirrors and smoke thinggy deliveres it perfectly. Good on you for putting it in clearer words

  4. I don’t get all this hoo-ha about the RBA (or whatever CB it is) lying through their back teeth that any downturn is not going to turn into a recession. Of course they aren’t, for staters it will piss off the pollies in power, and 2nd, it will automatically bring forward any slowdown as people sit up and take notice of what’s about to unfold, thus ensuring that it does happen.

    I doubt any CB has ever misunderstood what is likely to happen, they just lie about it and when it does happen everyone goes “geez, didn’t think that would happen!”

    None of this should be news.

  5. Hugh PavletichMEMBER

    … How well understood are the woes of the Chinese property market ? …

    It’s Not Just China Homebuyers. Now Property Suppliers Are Boycotting Loans. …Bloomberg

    https://www.bloomberg.com/news/articles/2022-07-20/china-s-loan-boycott-spreads-to-property-industry-suppliers

    Some suppliers to Chinese real estate developers are refusing to repay bank loans because of unpaid bills owed to them, a sign that the loan boycott that started with homebuyers is starting to spread.

    Hundreds of contractors to the property industry complained that they can no longer afford to pay their own bills because developers including China Evergrande Group still owe them money, Caixin reported, citing a statement it received from a supplier Tuesday.

    One group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after Evergrande’s cash crisis left them out of pocket.

    “We decided to stop paying all loans and arrears, and advise our peers to decline any requests to be paid on credit or commercial bill,” the group said in the letter dated July 15, which was sent to the developer’s Hubei office. “Evergrande should be held responsible for any consequence that follows because of the chain reaction of the supply-chain crisis.” … read more via hyperlink above …

    China Housing Woes Drag Junk Bond Market to Brink of Record Lows … Bloomberg

    https://www.bloomberg.com/news/articles/2022-07-20/china-junk-bonds-on-brink-of-record-low-as-property-woes-grow?srnd=premium-asia

    China’s Mortgage Boycott Capital Plans Property Bailout Fund … Bloomberg

    https://www.bloomberg.com/news/articles/2022-07-20/china-s-mortgage-boycott-capital-plans-property-bailout-fund?srnd=premium-asia

    … essential viewing …

    Can Chinese banks handle the mortgage crisis and the real estate bubble? … Lei’s Real Talk … Youtube
    … h/t PM …

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

  6. Hugh PavletichMEMBER

    Why do ‘schooled’ professionals … such as economists, appraisers and planners … often have baffling perspectives of markets ?

    I discussed some aspects of this important issue in 2009 … soon after the GFC …

    Housing Bubbles and Market Sense … Hugh Pavletich … Scoop NZ News

    https://www.scoop.co.nz/stories/BU0901/S00046.htm

  7. Hugh PavletichMEMBER

    Builders report 80% to 90% slump in new home inquiries and fear another 2009/10-style bust … Bernard Hickey … Interest Co NZ

    https://www.interest.co.nz/property/116840/builders-report-80-90-slump-new-home-inquiries-and-fear-another-200910-style-bust

    Pity they failed to deal effectively with fringe land artificial scarcity values and infrastructure debt financing, so affordable housing was able to be built and a production building culture restored.

    They will just have to learn the hard way. Tough.

  8. Hugh PavletichMEMBER

    United States …

    Ivy Zelman always needs to be listened to … being one of the few who got it right with the GFC … see ‘Housing Bubbles & Market Sense’ below …

    Price cuts in housing are inevitable, says Ivy Zelman … CNBC

    https://www.youtube.com/watch?v=GgxZg7oHGBE

    Zillow Reports BIG Home Price Crash in 10 Cities (50% in One Year) … Reventure Consulting … Youtube

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

    Housing Bubbles And Market Sense … Hugh Pavletich … Scoop News

    https://www.scoop.co.nz/stories/BU0901/S00046.htm

    Zelman & Associates

    https://www.zelmanassociates.com/

  9. Hugh PavletichMEMBER

    United States …

    There’s An Amazing Glut Of Office Space In Every Major Metro Area … Mike Shedlock … Zerohedge

    https://www.zerohedge.com/economics/theres-amazing-glut-office-space-every-major-metro-area

    Authored by Mike Shedlock via MishTalk.com,

    Occupancy is an engine of local economies. But there’s a huge glut of space available…

    (graph)

    Office Swipe rates via WSJ

    A Glut of Office Space
    The Wall Street Journal reports Big Cities Can’t Get Workers Back to the Office

    More than two years into the Covid-19 pandemic, exasperation is growing among business, city and community leaders across the U.S. who have seen offices left behind while life returns to normal at restaurants, airlines, sporting events and other places where people gather. Even after many employers have adopted hybrid schedules, less than half the number of prepandemic office workers are returning to business districts consistently. … read more via hyperlink above …

  10. Hugh PavletichMEMBER

    Essential viewing …

    Signs the Jacinda Ardern ‘gloss’ is wearing off fast in NZ … Andrew Bolt interviews Oliver Hartwich … Sky News Australia / Youtube

    https://www.youtube.com/watch?v=5OGsLAxPVCE

    Sky News host Andrew Bolt says there are signs the Jacinda Ardern “gloss” is wearing off fast in New Zealand.

    Mr Bolt discussed the issue with New Zealand Initiative Executive Director Dr Oliver Hartwich.

    “We now looking at an inflation scenario for New Zealand which is among the highest in the world,” he said.

    The New Zealand Initiative

    https://www.nzinitiative.org.nz/