With the Reserve Bank increasing the Official Cash Rate (OCR) last month for the first time in seven years, and banks following suit with increases to their own mortgage lending rates, we're beginning to see a change to the long-term climate of low interest rates that has reigned since the aftermath of the Global Financial Crisis (GFC).
We've asked a mortgage broker, an economist and financial advisors where they see interest rates settling and what the next few years might look like for new or recent borrowers walking into a world of increasing rates for the first time.
Squirrel chief executive John Bolton said interest rates were definitely on the way up, within the range of 4% to 5%, but to expect "cycles within cycles."
"Scaremongers would say 8% to 9% but the economy would self-destruct before that, 5.5% is the higher end of what I'd consider to be realistic," Bolton said.
"If you look at the Reserve Bank forecast, they saw the OCR settling at around 2% and home loans around 2% above that."
Brad Olsen, principal economist at Infometrics, also expected rates to increase over the next 18 months.
"There's certainly a view that we could see interest rates moving to within 4% for one-year fixed-term. We've already started to see rates start to rise at a relatively fast pace."
"A lot of that will not only be dictated by the New Zealand Reserve Bank but worldwide inflationary pressures. There's potential that after faster tightening, as it tries to remove economic stimulus, there could be a lull as the Reserve Bank looks to assess what's coming next," said Olsen.
Bolton agreed that the economy would settle down and the road ahead would become clearer, particularly as Covid restrictions ease and the Government reduces its financial support.
The biggest concentration of repricing since the 1990s
Olsen said many borrowers want to get as much as they can out of the low interest rates, through short-term fixing.
"Our analysis from mid-2021 showed that around two-thirds of all mortgage lending was due to come off fixed rates in the next 12 months. There's lots of repricing going on."
Olsen said this was the largest concentration of repricing since the 1990s when they began collecting this data.
He doesn't expect people to flock to five-year rates but said two to three year rates will be attractive as borrowers look to maintain a level of repayment certainty, despite the labour market being in a strong position.
"There's a feeling that people are still secure enough in their employment," Olsen said.
Bolton agreed that fixing for five years was probably a bit extreme. Though some might believe that rates will skyrocket, they will pay a premium for locking in that level of certainty.
He expects "a bunch of OCR increases in the short-term, they'll be pushing for 0.25 every chance they get. Expect to see it go up another 1% before we start to debate how much further it can go," Bolton said.
"We'll know next year how the economy responds to increasing interest rates, and how much it starts to slow everything down."
The OCR's now at 0.50%.
Full impact of Covid could take a couple of years to materialise
Bolton said the true effects of show-stopping events, like the Covid outbreak, the GFC and the 1987 share-market crash, are often not apparent until a couple of years after the event.
"After interest rates collapsed in 2009, we had a bit of an increase in rates because there was a perception the economy was taking off, then it plateaued and went down again. The economy was a bit delayed in responding," said Bolton.
So what does this look like for Kiwis who have taken out their mortgage over the last few years?
Bolton gave the example of a young professional couple with a $900,000 home loan, who would lose $800 to $900 out of their pockets each month, if confronted with a 1.5% increase.
"Because most Kiwis aren't saving money it has to come through as less expenditure: less travel, less eating out, less high end consumption."
Lockdowns have seen more spending on products over services - from everyday items right through to spa pools, cars and renovations, said Bolton.
Once the economy opens up, the balance will swing back in favour of services, particularly overseas travel.
If this has to be put on hold further as a result of interest rate rises and reduced discretionary income, this could be a tough pill to swallow.
Rising interest rates 'quite stressful'
Financial author Martin Hawes said households will need to "go through their budget line by line."
While savings may get a lot of the more established borrowers through, those who have taken out mortgages recently may be more at risk, particularly if something else goes wrong such a a job loss or a reduction in hours.
"Recent buyers who borrowed the maximum amount and only fixed for a year could be struggling again when that rolls over," Hawes said.
Hannah McQueen, founder of enable.me, said that if you've never experienced rising rates before it's quite stressful, though it doesn't mean people will quit discretionary spending.
Instead, buy now pay later will become more popular as a temporary means of ignoring the changing times.
McQueen said 15% of most most Kiwis' after-tax income goes on inefficiencies and that most people could weather the storm of interest rate rises, if they could deal to this "frittered" portion.
"It requires behavioral change and a different mindset, most Kiwis don't have this mindset. Conditions have allowed you to be quite relaxed in the past as long as you owned a property. Now it's harder to get ahead, the default will be that most won't," she said.
McQueen said it's unlikely to get to the point of mortgagee sales but it will affect "relationships, health, sleep and wellbeing."
As for travel, for some this will be a non-negotiable, even it it means incurring debt, after a grueling 18 months of yoyoing lockdowns.
"A lot of people will be weighing up mental health with travel and it's an investment in their own wellbeing,
"We'll be relaxed in justifying that," said McQueen.
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87 Comments
I went for a walk down the street today; first time on that route this week.
Last week, the hastily subdivided block (one into two) had a pro tem "For Sale" sign tack to the new front fence. It was the only sign of life in The Market. Today, there's a splashy, new, big "For Sale!!!" sign for both blocks....and....5 others have joined in up and down the street.
Perhaps the market is being spurred into life by the spectre of.....rising mortgage rates?
Certainly I agree. To me it seems like I am the only poor guy in this country and everyone else is on 200k + salary. 2000+ new real estate agents this year. They Sell 5 houses these days and enough to put a deposit for their own.
This is good. No hard work, only gains.
Great way to print money.
"Because most Kiwis aren't saving money it has to come through as less expenditure: less travel, less eating out, less high end consumption."
Right. So if the sheeple are not saving and have to lower consumption, that means less revenue, profit, and income derived from the consumer economy. Less rev, profit, and income means less money to specu-punt on housing. Lower house prices means less capacity to borrow and less 'wealth effect'. Which also results in less consumption and lower rev, profit, and income.
Can you see how the spiral works; which direction it heads in; and how it has the potential to feed off itself?
Which is why rates won't keep rising; unless they absolutely have to. And the only reason they'd absolutely have to is that they're rising globally and putting pressure on the $NZD and importing *a lot* of inflation to us. I tend to think that inflation *isn't* going to ease anytime soon, globally, and the pressure to raise rates will continue to wind up; but who knows, really? Has there ever been such uncertainty about *every* aspect of the near-term economic future?
And what if everyone elses' consumers stop consuming at the same time, just like our are likely to?
Why could that happen? eg:
HONG KONG: Shares of Chinese Property Developer, Fantasia Holdings, plunged 50 per cent after it said there is no guarantee that it will be able to meet its other financial obligations
Which is why rates won't keep rising; unless they absolutely have to.
Yes. But then there's the whole other can of worms that's already been opened (and rotting in the sunshine): financial repression. If they continue to recklessly manipulate the price of money, it's still going to hurt the sheeple. Honestly speaking, I think the ruling elite have a lot to answer for.
This is an interesting question: what happens if the current repression continues to work, as it has (kind of) for years now? What if central banks can all stick to the same script, keep rates low, continue pumping asset prices, and a combination of logistics improvements and weak growth (esp. from China) ease inflation? Right now, it looks like the story where inflation kills the market by forcing the rates up is possible; but if it doesn't happen, if asset prices just keep going up... what presents the next threat to the tottering edifice of financial confidence?
Demographics.
The 'haves' are going to start dying off, and the have-nots' are going to become dominant - and angry.
"But those dying will leave their assets to the next generation!". Will they? Have you seen the cost of living in shared accommodation (A Retirement Home, I believe the marketing brochures call them- and they all appear to have a pool table). In all likelihood any 'inheritance' will be gone; eaten up, literally, by the same debt based model that we see about us today. And all that will be left will be a lot of middle-aged, childless, very angry people.
I dont mean to burst your bubble - but rates are rising - 1.25% since July and are likely to continue rising for fixed rates for a long time more.
the quote in t he article is someone on a $900 000 mortgage will be paying $900 more a month if rates rise 1.5%. So effectively every new mortgage taken out this time last year when 1yr rates bottomed at 2.29% are now being refixed at $3.5%- that means that $900 000 mortgage is now roughly $750 more a month or close to $10 000 a year. Thats a lot of dinners, clothes and furniture purchases deferred so someone can pay the mortgage. To be honest its also an overseas holiday.
Don't forget those with cash wanting a _real_ holiday will be taking alot of cash overseas with them to spend when travel restrictions are eased (next year). We are chomping at the bit to get overseas for an extended period and enjoy ourselves. That money will not be spent in the NZ economy, sorry Queenstown.
Govt debasement of currency makes saving in the bank more or less a waste of time. Add in no/minimal bank guarantee on your deposit, if the crap really hits the fan and the banks need a haircut its the depositors that the hit - aka your money. Summary all downside, and at today's rates, very little upside
Yes, and No.
Much better to keep any additional repayments aside from any debt, e.g. Use an OffSet Account if you have a mortgage. The cost? Nil. The reason? If you need the liquidity, for whatever reason, you get it at the flick of a keystroke - transfer it to another bank/account. But if you've repaid the loan, and 'things' turn nasty, just try getting a redrawn of your old facility! "I'm sorry, sir, but...(pick your favourite reason here) but we can't re-lend you the money"
I'm in the same boat. Forget about saving money in the bank. Here's what you need to do.
This is possibly the best opportunity in time you'll ever have to change jobs and get a significant pay increase. Take it.
Contribute the max to kiwisaver that company will match, and no more. With their contribution and the governments, it's one of the only free lunches in life.
Download a free net worth/wealth tracking app on your phone and keep track of your assets and liabilities.
Pay off all those debts as quick as possible.
Cut your expenses down. You can still have fun.
Build up enough cash for an emergency fund and no more.
If you don't have a house you've got to start building some assets.
Use as much as possible to 'dollar cost average' every week into a combination of 90% low cost index funds, and 10% Bitcoin.
In 5 years you'll be a new man. Good luck.
Lasset
Where did you come from? You're almost right. You've got the right idea. The ability to save has to be established at a fairly young age. The ASB (then NZ owned) used to come into primary schools and encourage kids to open a savings account. The interest rates were probably as low as they are now. You need discipline to develop a savings plan; you need to want to look at your balance frequently and get a thrill as you see the increasing balance. My grandmother used to give me 5 pounds whenever I achieved another 100 pounds (this was before decimal currency). Today's grandparents should be doing something similar. I used to do all kinds of pocket-money jobs for neighbours. We didn't have coffee bars so we spent a little on lollies or an occasionally a milkshake or icecream. I never thought that I stinted myself. Of course there was no such thing as apps and smart phones and computers to sap your savings.
I bought my first house for $11,500 at 19 years old with a deposit of $3000.00 in 1968. I still didn't have a career in mind and no permanent employment. I sold it a decade later for $43,500 to the motel owner next door. I lost most of this when I was persuaded by my father to join with him in building some spec home units in 1979; tell the bank economists that there was a real severe property slump in 1979, most of them wouldn't know about it; the little dip in prices after the GFC was not even worth noting, but it's all the economists can remember.
I had to start saving all over again and it worked out in the long run.
5 years? Put some into bitcoin, spend a weeks evenings researching bluechip crypto, bang the rest in there and he might have a chance at a house deposit in 5 years. Or, low cost index funds, and maybe a deposit before he retires if he can even keep up with inflation
I agree, its a doom loop.
Yields will fall in the second half of next year when the supply chain frees up and rates will have to fall to pay for all the extra debt now in the system.
US 10 year is already done from its highs. Disinflation is on its way.
I would say lock in for 18 months if refixing now
I understand you don't want OCR to be increased. But lets face it, now interest rate is increasing and it's way to early to make a call when it's going to stop. US inflation's not looking to ease anytime soon, unemployment rate is continue to fall, tapering just started and it's a slow process. US 10 year yield would be able to give much information about NZ rates market. Here we have a completely different situation, inflation hits 4.9% and likely continue to go up as Christmas is around the corner. Labour market is scorching hot at the moment. All indications that inflation is here to stay in New Zealand for long term and RBNZ have to match its OCR to fulfill its mandate to keep its reputation.
I would say rates wont come down and disinflation won't happen until housing price stabilised or came down to normal level, as it's the indication of over injected money flowing in the market.
I didnt say i didnt want the OCR to increase.
Infact i think it would be a good thing if it could be sustained for years to come but it simply cannot.
The worlds economy now relies on debt expansion and the existing debt needs to be servicable. Yes we have inflation currently but my view is it wont last. The massive forces of all the baby boomers retiring is huge, couple that with technology and the most debt the world has ever seen and the inflation game in the medium long term will always be on the downside up until something crazy happens like UBI.
Interest rates are going up just how much will depend on inflation. NZ is just a small part of a large pond once other countries raise we will just follow as our house prices are so over average income this will be a blood bath and if you have bought in last 2-3 years you will lose and be in negative equity, sad but true.if anyone is thinking of buying now I think we are at top right now we’ve put our flag in and a storm is coming wait and see . A few years ago 50k in a year making on a house would be huge now same amount in 3 months it’s mental and completely bonkers to think house prices cant go any higher.
I am fixed until November 2022. I know it's likely rates will be quite a bit higher by then.
In the mean time, I have a credit card to pay off. Once that's paid off by November 2022, my net position should be similar when I come off my fixed mortgage and start paying more on that. So that gives me some comfort, I am more than comfortable based on current income vs outgoings.
I will probably go on to floating mortgage next November, and wait for the next recession and the OCR to plummet again before refixing.
I'd suggest that Housing has become very "financialised" over the years.
This results in housing becoming particularly sensitive to interest rates.. more so than ever before.
One of the models I follow suggests a 1% change in interest rates can impact the mkt by 10% +/-
eg. 1% rise in mortgage rates can suggest a 10% fall in prices...
(Of course, other factors also influence price.... so this is not a prediction, just saying that interest rates are a big deal.... Call it a strong headwind ! )
The average wage is around 60 k in NZ so if couple have no debt they would have 90 k income after tax how can anyone afford to save 180 k for deposit and if they manage to do that the mortgage in Auckland would be around 1.2 million less 180 k leaves just over a million this over 30 years at 5.5 rate would cost 5800 a month this would give them 1700 between them a month to pay all the bills food power car ect if rates go up another 1% this would cut income left to 900 for the month at that point it’s time to go bankrupt. And if one of them has hour cut or loses job or have a baby this is not living it’s existing. I know most people on this website would like house prices to continue to go up but if this was your kids would you advise them to buy. This is going to end badly and we are going to all lose it will take years for country to recover
There is surely a point at which the "average" couple do not have enough working hours left in their life to actually pay off the principal. I'm guessing someone could compute the age at which if you haven't bought a house you likely will never be able to unless gaining a inheritance or lotto
1. The average wage goes up each year.
2. If they're on the average wage now then they should be on higher than the average wage in a few years due to career progression.
3. Their debt is not getting bigger
So when interest rates don't increase, the debt gets a little easier to pay each year.
When interest rates do increase - yep that's tough.
Sure 50 years, right say you manage to get a deposit at 20 (LOL) you will be 70 before manage to pay it off, a retiree on less income. Say you save the deposit by 30 you will be 80 by the time you pay it off. Then what about your children when house prices are an average of $10,000,000 just extend the repayments to 100 years right?
If inflation is still around 5% slashing OCR would make NZD worthless the RBNZ are powerless compared to rest of world financial body’s. The best they would do is buy the house off you for maybe 25% of today’s value and rent it back out to you so thousands of people are not on the streets
Not if inflation stays high interest rates will have go up why is this so hard for you to understand, and if as you say a recession will come around what makes you think interest rate will go down as this has what has been done for years and people know it is just kicking can down the road but now there is so much debt around the world anyone in houses stocks should be very careful.
My idea to save pain, mainly for the banks, would be to have a tiered interest rate, on for existing lending and one for new lending, that would mean people with existing loans wouldn't be forced into bankruptcy, but people buying or upgrading their houses would have to pay more, forcing house prices down.
Are they mandated to raise the OCR even if doing so has limited limited impact on the CPI?
My point is - their mandate relates to the CPI and not the OCR.
And if raising the OCR does little if anything to address the CPI, and potentially detrimentally impacts their other mandates (employment, financial stability), why should they do so (to any meaningful extent).
By the way, their mandate in the legislation in terms of inflation relates to the 'medium term', so in terms of the legislation, they are perfectly entitled to look through short term inflation.
Well...it hasn't worked the other way around, yet they kept doing it and pumping property as a result.
So I don't see why they shouldn't do the inverse action just because it doesn't work, if that hasn't stopped them before.
But I suspect it'll be a good excuse to avoid action and keep property inflated.
How low were some banks testing at? 5 -6 % . Imo Kiwis should feel annoyed that we can't lock in these low rates for 30 years like they can in the USA. I don't know why NZers have taken such a risk. I remember a few years ago people were saying that rates wouldn't rise.
Also assumes that borrowers/brokers haven't been stretching the truth about income and expenses on the application. UBS did a recent study in Australia and uncovered quite widespread dishonesty, to varying degrees, in terms of representing their credit worthiness.
High interest rates are BAD, only the rich benefit from this, it lessens the circling of money, so others do not benefit and in time the economy suffers, this happened in the 80s ,morgages were 20 plus percent, outrageous , should NEVER have been allowed, the David Longee government and later National governments were also to blame,letting free market go crazy, many people suffered.
If this happened NOW, NZ would be DESTROYED, double digit interest rates are unwise and dangerous for the present, it cause terrible hardship for the average kiwis and be WORSE for the poor, they would have NO CHANCE
"Scaremongers would say 8% to 9% but the economy would self-destruct before that, 5.5% is the higher end of what I'd consider to be realistic," Bolton said.
How old these guys, experts? And dont they think economies existed before the 1990s?
Up to around 2008, the ave interest rate was 8%..over the previous 40 years...
And lets not forget, the 1970s/80s where they got up to 27% and 32%, where I could guess they where not out of nappies by then
And do not forget.. oh they are not old enough, the 1920s thru to 1940...
And the Author? Doubt he was around, and why ask 'experts' who not only not old enough but dont have the basic damn sense to actually look thru history and its fundamentals?
Dejavue.....The general economic reporting , warnings, that have taken place in the last 6 to 12 months in particular, all seem to be re writing of the same reports, predictions from around 1968, the 1970s. Including the general advise to pay down debt....while interest rates where low.
As usually the human race is doomed because it cant learn from history, because of these type of 'expert' people.
I in general take notice of experts, but in this case, I dont see any...
Edit: I dont have the actual numbers , but since the 1940s to now ( 70yrs) I would estimate the ave interest rate would be around the 8 to 10%. And 8% scaremongering? Throw in go back to say 1870s and think would be even higher...
.
6% mortgage rates are coming to a bank near you, get prepared for it you have 6 months. Kiwis will have to adjust their spending. You had trouble finding a restaurant in NZ back in the 1980's, now there are dozens of them even in the suburbs. People are just going to have to learn how to make their own sandwiches again and quit that $6 coffee everyday.
About 5 months ago I fixed my mortgage at 3.39% for 5 years knowing that interest rates were going to rise significantly.
Now only 1 bank has a rate that is lower, and only by 0.1%, and that rate is a 1 year rate.
I'm laughing - I know exactly how much I'll be paying each fortnight for the next 4.5 years, and I'm paying it off as fast as I can to take advantage of the interest rate.
The writing was on the wall 6 months ago that rates were going to rise, and rise a lot. It was absolutely worth the break fee.
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