A 1% rise in mortgage rates would chew up about 5% of Aucklanders’ and 3% of other New Zealanders’ disposable incomes, warns ANZ NZ Chief Economist Sharon Zollner.
She delivered this “gale force headwind warning” as Reserve Bank (RBNZ) Governor Adrian Orr said it was too early for the central bank to say whether it’s going to do more to try to suppress rising long-term bond yields.
Financial markets have for several weeks been placing increasingly large bets on rising inflation and interest rates.
Zollner noted the RBNZ has kept monetary policy loose, recognising temporary factors, like higher freight costs caused by closed borders, are partly what’s sending inflation expectations up.
By holding the Official Cash Rate (OCR) at a record low and keeping its Large-Scale Asset Purchase (LSAP) Programme and Funding for Lending Programme (FLP) ticking along, the RBNZ is trying to prevent financial conditions tightening.
However, faced with rising bond yields, the Reserve Bank of Australia last week started doubling down on its weekly bond purchases via its version of the LSAP.
Asked, at an economics forum hosted by Waikato University on Thursday, for his response to the situation, Orr said: “We will be assessing how economic conditions unfold and whether we need to be doing anything with our monetary policy stance.
“At present it is far too early to have any concern over what we’ve observed. We’re still in the watching and waiting game.”
So the RBNZ has not - yet at least - opted to go into battle with impatient markets by increasing its bond buying rate to put downward pressure on bond yields.
It’s continuing to buy $570 million of New Zealand Government Bonds from the secondary market a week - less than when it first launched the programme last year.
Speaking to interest.co.nz on Tuesday, RBNZ Assistant Governor Christian Hawkesby reminded markets the RBNZ could increase that bond-buying rate for a time.
Hawkesby said there had been “pockets of dysfunction” in bond markets.
“There is a lot of talk of thinly liquid conditions. So, we do have that optionality; so we can scale up the size of the [LSAP] programme, if we think that would be appropriate,” he said.
Zollner noted much of the liquidity provided by the RBNZ had been gobbled up by mortgages and financial conditions were tight.
She said the $28 billion of cheap funding made available to retail banks by the RBNZ (which remains largely untapped at $1.14 billion) is small in the bigger scheme of things.
She said tightening conditions wouldn’t be a bad thing in terms of slowing mortgage lending growth. But this wouldn't follow the RBNZ’s plan.
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82 Comments
Another video to watch that explains it clearly. https://www.rt.com/shows/keiser-report/517097-inflation-expectations-ho…
"A 1% rise in mortgage rates would chew up about 5% of Aucklanders’ and 3% of other New Zealanders’ disposable incomes,"
And why is that?
The size of the principal of the debt involved.
If the debt; the purchase price of the underlying asset involved was half what it is today, what would the effect be Sharon.....
"Debt doesn't matter, until it does"
But another 5% of your income shouldn't matter because people factored an increase in and so did the banks. People should be able to handle a 2% or even a 3% rise because its bound to happen over the duration of the 25 year mortgage. Lending should be stress tested at at least 6% or even 7%.
"She delivered this “gale force headwind warning”..."
You're right. It shouldn't matter, but Sharon obviously thinks it does....
The average long term 2 years fixed rate mortgage price used to be .....7.85%.
That's a lot higher than a 1% increase for most of the indebted at the moment, and naively assuming "They'll never let it get back there!" is the same thinking as "The oil price will never go negative".
If average mortgages are $500K in Auckland and interest is say 3% then a 1% rise is an increase of 33% or $50 a week that will not be spent elsewhere so less GST/Paye/more liquidations and increased benefits costs. The Global Elites got us into this mess and now do not know how to exit without the kind of pain that threatens their own survival.The economic future globally is going to be very ugly but at least we are not The Republic of Ireland (Idiots) were debt to GDP is over 800% and if you have a pragmatic solution to this may I borrow your Crystal Ball and Magic stick to help me pick next weeks Lotto numbers.
The problem isn't necessarily people not being able to handle the increase - it's what happens when lots of people's disposable income decreases all at once. I made sure, before I got a mortgage, that I could comfortably afford it if rates went to 7%. But if they do, that's close to $300 a week I can't spend on other things. (Now of course the sensible thing to do with a surplus like that is to save it for house related expenses like repairs or make extra payments on your mortgage. But a lot of people don't do that). Multiply that over everyone with a mortgage, and that's a lot of money that now isn't going on renovations, or eating out, or new cars, or holidays - and those industries get slammed (again, in the case of the tourism industry).
Also I think its bollocks that banks were being sensible and stress testing to the appropriate level. Multiple banks told me I could borrow what quite frankly were stupid amounts given my income. Needless to say I borrowed a lot less than they offered to lend.
Carlos67...if interest rates rise 3% there will be carnage. Maybe be OK for older people like us but (a high number of) the younger Aucklanders with 7 figure mortgages will be in a world of hurt.
And I think the main point Zollner (rightly) makes is that it would take a lot of money out of the money merry go round in two ways. People would have less to spend if they had to pay more interest and also people would be more inclined to try to save more and pay down their debt faster so it would be a double whammy in terms of taking money out of the system, which would be a huge concern.
Instead of buying new SUVs and boats many of the greedy property investors would be incentivised (or even forced) to start making principal repayments as well as interest payments.
Will borrowers default? Probably not many. Will the economy tank? More likely. Businesses need customers to spend money. Money is from disposable income. Much less disposable income hurts businesses. On top of that, I think what I'd do if a massive percentage of my take home pay is now going on the mortgage and I'm sitting on chunky capital gains...I'd sell out...especially if I'm an investor. And so interest rates simply cannot be allowed to go up. We're trapped. None of this is news...it's always been known that more debt means less ability to raise interest rates. Japanification here we come.
Banks might. But 90% of mortgage holders do not think like this.
The stress test by banks is to protect the banks liquidity, not the mortgage holders lifestyle.
And It would be carnage, current values are only sustained by cheap Interest rates.
My pick - the reason why the govt or rbnz do nothing is because they understand how fragile it actually is and don't want to tip it over until our economy is fully functioning again post covid.
Fluffy - a fully functioning economy may be a decade away and that assumes pragmatic policies are enacted globally and there is little sign that leaders have any idea or intention of listening and implementing the ideas of those do understand howto exit the mess we are all in.
Yeah if rates go up then people will just have to suck it up, no new cars, trips or dinners out all the time. Just drive that existing car for a few more years and its not like your going on any overseas holidays anytime soon either. No idea how you would afford all that anyway, I'm 54 and have not bought a new car ever !
I do wonder how deep bank models go?
On an individual basis, then yes, you'd expect each mortgage holder to cut spending somewhere to keep up with mortgage payments.
But when those household budget cuts then impact local business and the money flowing through them to other mortgage holders......
Liquity and risk? Some budget work extends years (10+)
I work in FS. Liquidity of the banking system is not a problem. One thing we did learn well from gfc was a need for regulation to keep banks full of reserves. Though Even without this in nz we've never seen the worst of what deregulation in finance can offer (few dodgy finance cos aside).
Household debt.. Not so much. That's where the train wreck lies.
It will chew them up and spit them out like a spoiled apple. Figures being bandied about those that are over exposed, caught in interest only mortgages and about to be slammed by the mortgage holidays easing off, will be understated, probably very much so. The housing situation has been allowed to deteriorate to a shocking level of a potential catastrophe. If rates remain at present levels the risks continue to compound in terms of escalating demand and prices for housing, and increases will precipitate a season of foreclosures and ruinous circumstances for a considerable number of NZrs. Betwixt the devil and the deep blue sea never rang truer, for the powers that be.
I guess what we need to realise is that we're living in an experiment - central bankers and economists in general don't understand 'exactly' how people and money and markets function - in the same respect that scientists don't understand the laws of the universe (or Drs how to treat/prevent cancer or other diseases). One day we might - but for now we have to put up with their lack of understanding, while they pretend to play god (which is the bit that pisses me off - if they were just more honest with people about how this is an experiment then we'd all be better off).
The average person, because its too difficult to mentally process, just prefers to assume that central bankers know what they are doing. Although I think more and more people are waking up to the fact that central bankers don't have their best interests at heart (especially if younger or don't own many assets).
Anything is on the cards. The free market has been destroyed due to manipulation of one of the biggest inputs, being interest. As a consequence nothing is being priced based on any economic reality. Malinvestment galore.
How can anyone make an informed decision when the market is not operating efficiently and is subject to the whims of mr adrian Or ful?
Picking anything in this environment is guess work. So spread your guesses.
By Aucklanders, she means home-owning Aucklanders with massive mortgages. Those without a mountain of debt will have just as much disposable income as they always have
When bubbles burst, they affect everyone. Not just those with massive mortgages. In all likelihood, the income streams of everyone are threatened. Property bubbles are tolerated because they are deemed to positively impact everyone through the wealth effect, particularly through consumer spending. The reverse happens on the way down. I suggest you look at the Japan bubble as a good case study.
Central Bankers are losing control. What a nightmare. Markets are trying to function and start re-pricing assets, and these idiots are now trapped trying to protect the bubbles they created. Was always going to happen. They kicked and kicked the can down the road, didn't deleverage, and now we are faced with a catastrophic crash in due course - a crash that will make the GFC look like a sunday school picnic.
Not sure if you follow Ray Dalio but I've found reading his updates useful from a macro view - and looking back across history.
What we're seeing isn't new. The end of a long debt cycle. Its just that most can't recognise it because they've never witnessed one before in their lifetime.
The only real question is: shall we let the markets find the new balance now, or shall we kick the can down the road a little big longer ? The second options is the more tempting, but the problem with it is that by then we will have to deal with an even bigger housing Ponzi.
I say: let's accept reality now, and let's start freeing the interest rates and bond markets now, accept reality and increase the OCR, and the markets will find the new balance. After all, haven't the specuvestors always claimed that they want free markets? Let's have free markets, now.
No we wouldnt...although its difficult to ascertain what position we would be in. Even better would have been never to have started the replacement of the business cycle with exponential credit in the first place...hindsight is a wonderful thing.
The most curious thing is that we had historical precedent which should have fore-warned us.
Indeed. Have heard George Gammon say they always choose to destroy the currency rather than deliberately allow deleverage. No surprise this time around.
Our inclinations will always be like this, but that may finally stop mattering when machines are doing most of the work.
Follow him religiously. Be prepared for a rainy day, may last a few years but when people are in a depression or recession they can't see the bright light. Be in a position to grab any bargains. Kiwibonds look like a pretty safe bet after 15+ solid years of growth in share markets/equities.
If there was going to be a crash it would have been at the start of Covid. Personally I have given up trying to predict a crash because if Covid didn't make it happen this NZ house party can just keep on going and going. Just cannot see any short term changes, sure it may eventually crash but if that happens in 10 years time who cares ? certainly nobody in control or any home owners right now because their home would have doubled in price by then.
The problem with human thinking is that if something is predicted for a long time & doesn't happen, people then think it's not going to happen.
I personally don't understand that thinking, it really astounds me, but I do recognise it as a 'thing', a glitch in human psychology.
If something is inherently unstable but doesn't collapse today, the odds are greater that it will happen tomorrow.
If erosion is wearing away at a standing stone structure in the ocean, the process of destabilisation will continue to its eventual conclusion. We don't think "oh, it didn't fall over today - that means it won't fall over".....at least, I don't anyway.
I think its pure logic, the longer this goes on with no crash then the less likely a crash will be. Statistically a house price crash is in the extremely unlikely category. If Covid couldn't bring it down then its practically bullet proof. The only thing that astounded me was the degree the government jumped in to keep the party going. I think you need to ask yourself the question, how far can government subsidies go ? Will they even extend to the Government paying your mortgage directly ? I mean they are already paying it indirectly.
It's not logic as far as I'm concerned. You claim that if COVID couldn't bring it down then nothing can, but that is pure supposition on your part. I think of it like a fire. The outbreak of 'COVID' was a fire, & they've used us most of their water fighting that, so I think fundamentally the central banks & government are in a weaker position than ever as we move forward. Every time you cut interest rates or blow out the balance sheet or debase the currency, you are expending more of your available ammunition - and there are more market distortions and unintended consequences as a by-product.
Carlos67...all I can tell you is that we are a train belting down the track at full speed. At the end of the track is a brick wall and when we hit that wall everything as we know it will count for nothing including the fact that house prices in NZ have doubled every ten years over a FOUR SAMPLE period. There might even be more track left than we have life left (although I doubt it) but then again the track may end right around the next corner.
Nobody (including me) can tell you how much track we have left but what I can tell you with certainty is the track is not unending and when we finally do run out of track and hit the wall the consequences for the property market will be worse than you can even imagine and the recovery may take so long that even our kids may not be around to see it. I just hope we have more track left than what I guess we have.
To be fair, Covid 19 and the economic effects hasn't been too bad here, for our property bubble to crash of some sort, the 'foundations' it's built on have to give way. I don't see that happening anytime soon though I can tell you that what we're seeing isn't normal market phenomena.
Hawkesby said there had been “pockets of dysfunction” in bond markets.
Exactly: dealers in the US are hoarding. Hence they are prepared to lend cash to access pristine US Treasury collateral below 0.00%.
Historic Repo Market Insanity: 10Y Treasury Trades At -4% In Repo Ahead Of Monster Short Squeeze
Of futher interest :
Watch Real, Not Nominal Yields
Oil Surges As OPEC+ Agrees To Keep Output Unchanged In April
Daily Treasury Real Yield Curve Rates
A sobering read.
The thing is, I've given up hope that the Government can or will do much about this. Both of our major political parties are now holding the shards of last century’s big broken promises in their hands. Both parties are culpable. This is not a problem that arose a year ago and both the Key and the Clark governments helped stoked the bonfire upon which the current Government is both tipping fuel....I did the sums - if we cut our annual grocery and food bill to nothing .... we still would not save enough money to make up the difference between what was a 20 percent deposit in 2019 and what is one now.
https://www.newsroom.co.nz/anna-rawhiti-connell-angry-nausea-over-broke…
The reserve bank and the government need to work out a way to REFI the existing owner occupier mortgage holders. Fanny and Freddie style with long term low fixed rates backed with sovereign guarantee. At the same time find another 10-15% of those currently renting that can afford to pay a mortgage and finance them in as well. The balance of 20-30% will need to rent either from the state or professional well capitalised landlords who can afford to comply with laws and standards. To make them worthy of the billions in accommodation supplements paid out each year. Specuvestors on the other hand need to be squeezed out . Like the turds they are. By a combination of higher interest rates and tougher housing standards. If you want to be a property investor. Go and do something useful in the economy first. Make some real money. Then you can invest in property.
This is the reset we need, but not the reset we'll get. I suspect it will continue to spiral out of control until an external shock drops everything (including employment) to the floor. The best time was years ago, but the next best time is today. Tomorrow might be too late.
It's the ridiculous price of houses that is keeping New Zealanders poor. Imagine if houses were only 3-4-5 times income. New Zealanders would have more money in pocket to spend with great effect on the economy. (And New Zealanders would live more like they deserve)
Yeah, I think we forget that it's only a very recent development that retired people are the ones with most disposable income. When I was a kid, there certainly wasn't lots of advertising of high-end goods and holidays aimed at pensioners. And it's not likely to continue. People of my generation will, if they are lucky, be paying off houses into retirement, and will be unable to save much for holidays and so on. If they are unlucky they will still be trying to scrape together the rent.
Yeah, I think we forget that it's only a very recent development that retired people are the ones with most disposable income
Are you sure? How much disposable income to retirees have? Data suggests that many households across NZ and Australia are living paycheck to paycheck across all age groups and socio-economic classes.
Also...Interest rates stay low then asset prices (in NZ that house prices) stay way overvalued leading to all sorts of social issues linked to inequality. But easy to see it as just some people moaning when it's not you suffering. Easy to think the problem isn't that big if you and yours aren't surrounded by it.
Frustrating video with Hawkesby, Jenée asks some very good questions then Hawkesby waffles on but does not actually answer the question. The only take is that the RB absolutely does NOT want interest rates to rise and is prepared to do anything they can to stop rates rising, including a negative OCR.
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