This is going to be like a kind of rolling mortgage earthquake.
While we are all rightly gobsmacked by the idea of an inflation rate with a '7' in front of it for the first time in 30 years, those among us with mortgages are facing potentially much worse carnage when it comes to refixing the rate with our bank.
I've been indulging in the increasingly fraught exercise of having a play with the interest.co.nz mortgage calculator and I'll share some of the results.
The upshot is that someone who took out a 30-year mortgage last May (2021) fixed for a year, and who is now looking to refix, could find their monthly payments will go UP BY EXACTLY A THIRD.
That puts 7% inflation in the shade.
In dollar terms someone who took out an 'average-sized' mortgage ($329,000 as of May 2021) could face an increase in their monthly payments of $419 (over $5000 for a year). An 'average-sized' first home buyer mortgage ($548,000 as of May 2021) would cost an extra $698 a month (well over $8000 for a year). See bottom of article*
These examples are both based on ANZ and BNZ rates (given their, at time of writing 'market leading' hikes). In May 2021 both banks offered one-year 'specials' at 2.25% and now both are offering 4.55%. (It's these most recent market leading hikes that prompted this article).
I think mortgage rate rises could be seen coming about a year ago - I certainly thought they would rise this year. But I have been stunned by how far and how fast they've gone and I've got to confess, I'm seriously concerned now that it might be too far and too fast. Something might give.
Higher interest rates are 'the cure' for an inflation rate that has a '7' in front of it. And lest anybody (and I think a lot actually did) doubt that our Reserve Bank would get dead serious about fighting inflation as the first, second, and third priority then all doubts have now been laid to rest, through the 50 basis point hike in the Official Cash Rate last week and subsequent comments from RBNZ Governor Adrian Orr.
I've said before, and I will reiterate, these higher mortgage rates are something that we are going to need to keep a close eye on.
It's not that the interest rates themselves are so scary high. I made my first mortgage payment in 1991 on an interest rate of 12%. But that was on a mortgage of $127,000 (which was a high-LVR one!). Now there's people out there with seven figure mortgages.
We inflated our housing market by 40% between the start of the pandemic in 2020 and the end of last year. And of course we inflated the size of mortgages similarly. They are now huge.
And of course it's the fact that in respect of interest rates we've come from such a low base, with historically low rates that - unfortunately - I think some people had decided were here forever. Some people thought the housing market had been granted permanent immunity from higher rates.
Now we've got Adrian Orr looking very determined to put inflation back in its box, and we've got the suggestions that short term fixed mortgage rate rises have 'quite a way to go' this year.
My concern is that people don't tend to shout from the rooftops about their personal financial situations and the decisions they've made. Absolutely fair enough, of course. But it does mean that some folk tend to 'suffer in silence'.
Stepping away from home ownership for a moment, the higher costs of living are bringing obvious poverty effects for low income earners. To the extent that it becomes obvious that lower income people can't meet costs well then you would hope there is help and assistance available. You would hope.
Being crippled by a mortgage is a rather different thing. You might argue it's a 'middle-class problem' because the people concerned do at least (for the moment) have their own homes. (Let them eat cake.) But there's probably a big trap with that in the sense that such people won't want to let on the extent to which they are struggling. This could be an evolving 'hidden poverty' story.
The RBNZ has made clear it is taking aim at inflation. High interest rates are the penalty. And boy, are some people going to be penalised as more and more homeowners come to refix their mortgages. Of course, don't forget that the mortgage payers still have to contend with that 7% inflation.
Inevitably there are those that will say nobody was forcing anybody to buy houses and take out these whacking great mortgages. Live with the consequences, they might say. Okay, but the desire for home ownership is so deeply ingrained in New Zealand that you are never going to stop Kiwis buying houses. With such a mindset there's always a risk that significant portions of our population might get 'caught out'.
In this instance the pain of homeowners is likely to be shared around, simply because of the outsized role in the New Zealand economy the house market plays. Where the homeowner suffering goes the economy will follow.
Those bigger mortgage payments are going to see reduced spending in the economy. Some people might put their houses on the market, thus increasing the slump already starting to emerge. And so it goes on. I'm not talking here about in the years to come either. This situation is upon us now and I think it will all start to happen pretty quickly.
That's why the situation needs watching carefully because it could get away on us.
Independent global economic researchers Capital Economics have a standing prediction that falling house prices will force the RBNZ to begin cutting interest rates again next year.
I don't think you can rule out such a scenario at all. Big mortgages. Big interest payments. No money to spend. Businesses suffer. Economy tanks.
What could or should the Government do? Good question. But if this Government stays true to form anything it comes up with will be late and reactive.
In the meantime I guess all we can do is watch and wait and hope things don't get as bad as it appears they might.
*The full details of these examples are:
- Average-sized new 30-year mortgage of $329,000 taken out in May 2021 fixed for one year at 2.25%, with monthly payments of $1258.
- Mortgage refixed after a year at a new rate (one-year) of 4.55%, with monthly payments of $1677 - a $419 a month increase.
- Average-sized new first home buyer 30-year mortgage of $548,000 taken out in May 2021 fixed for one year at 2.25%, with monthly payments of $2095.
- Mortgage refixed after a year at a new rate (one-year) of 4.55%, with monthly payments of $2793 - a $698 a month increase.
191 Comments
Much depends on what that stress testing looked like in practice. The banks don't much care if you have to eat only instant noodles in order to meet the repayments.
Certainly borrowers should have been comfortable with rates at this level. Doesn't mean they actually were. And the size of mortgages these days, relative to incomes, suggest many were pushing to the limit.
Inevitably there are those that will say nobody was forcing anybody to buy houses and take out these whacking great mortgages...Okay, but
Agree. I have sympathy for the FHB caught in fear that if they didn't buy they'd be locked out of home ownership by the RBNZ action for...well, forever.
If the ship does hit the flan, they can be well justified being very angry indeed with successive Reserve Bank and government regimes for the absurd policy that has brought our housing bubble to this point.
Imagine the wealth erosion a potential FHB would have seen had they waited since 2013 because free market fundamentals suggested there was a problem, only to watch market interventions from successive governments and Reserve Bank cohorts transfer wealth en masse from savings and wages into assets...
I wish I could give that comment a thousand thumbs up. Most people are seemingly ignoring the fact that where the housing market is now is due to the gov and reserve bank. Question is now, what’s preferable. Inflation or tipping the economy into a recession? There’s no painless solutions to self made problems :(.
I think we as New Zealander's need to take some responsibility for where the market is at. We vote for the parties that get in power and they represent us. Whenever a government over the last 10 years has tried to tackle the housing market it has been met by a fury of opposition from the general public who vote them in. Greed, hubris and ignorance has got us where we are.
I think that there is no alternative between inflation and recession: there is only the alternative between out of control inflation and recession, or a recession with moderate inflation. The only question is how deep a recession will have to be for inflation to get under control, and what sectors of the economy will be impacted. Hopefully the impact will be mostly and directly concentrated on the housing Ponzi, with controlled impact on the other sectors.
Sure. Doesn't mean they have to just accept the consequences of others' greed without complaint, though.
Maybe they just need to realise the real game is regulatory capture and self-enrichment, as their elders have demonstrated. As they watched property get bailed out and assisted since the GFC and - massively - since COVID, they could be excused for feeling they had to get in or get left behind by the next round of whatever welfare or monetary policy devices might be found for bailing it out yet again...
really..
https://www.rbnz.govt.nz/news/2020/03/ocr-reduced-to-025-percent-for-ne…
to believe the govt was not having conversations about a joint response is being deliberately ignorant
I was a potential FHB during the last two years. I actually missed buying one because I refused to go up another 10k, and now I count my lucky stars. Eventually I decided that the asking prices were just not sane and stopped looking. I think there is an element of buyer-beware, no one was forcing you at gunpoint to buy a house, renting has always been an option.
Same boat mate! Although didn't get to purchasing stage, had the money for it. Decided to whack it in commodity stocks and wait for this to happen. Glad I can watch this from the sidelines but gutted for my mates (in 20s) that have bought recently. The level of even basic economic understanding is unfortunately not there.
One of my employees bought late last year, I tried to talk them out of it, I just dont talk about the housing market anymore. A friends child was also in FOMO land desperately feeling like they were missing out because they didnt have an investment property, luckily they were talked out of it.
Its pretty obvious the speculators/developers are out of the market. I think the upward price pressure put on by housing was gigantic.
Some common financial warning signs that someone may have a problem with gambling include: Money missing from bank accounts, wallet/purse or money jar. Household items and valuables missing. Regularly short of money even though they earn a wage.
Sounds very similar to one who takes too much debt in hope of the interest rate will never increase.
who takes too much debt in hope of the interest rate will never increase
The whole thing was so askew that for many it wasn’t “hope”, it was a 100% firm belief that interest rates will not be increasing for several years. That’s how absolutely insane things got. Literally gambling with huge debt.
This is a nasty comment. It is not appropriate to compare, for example a first-home buyer to a gambler. Also, keep in mind that the Reserve Bank/government themselves signaled to buy by dropping the cash rate and the lending restrictions.
The question is now, how to get out of this mess. Many here don't seem to realise that it is not only mortgagees who are at risk, it is the wider economy. A crash could destroy the livelihood of many, including renters, via job losses, possibly bank defaults, etc.
Also, I think it is illusionary to consider that renters may be able to buy into a housing crash. This may be true in a correction, but not in a crash. Even if prices fall very low in a crash, banks are unlikely to lend in that scenario.
A prudent way forward for the Reserve Bank would be to avoid economic collapse by keeping interest rates low. Then, both inflation and the housing market correction could be allowed to run their course.
This would ensure the debt mountain is devalued via inflation, whilst keeping the economy afloat by avoiding a crash. This should be in the interest of every Kiwi.
It is not the time for big words now, but for prudence. We are in a dangerous situation.
I was always told to budget on 8% mortgage rates, I never expected the last two years rates to be the norm but did manage to lock in a low rate in but increased my payments at same time. There needs to be some self reflection by people if they have taken on too much debt, probably didn't help by certain sectors saying these rates are the new norm.
The problem with some of these comments is that it appears some want us to feel bad for people who are not so financially prudent.
I also take a Conservative approach to my lending. The price for this is potentially loosing gains from lower leverage, the benefits of corse is insulation against market swings.
We need to let the market be the market. You took too much debt? Only one person to blame.
Some people had the option of either not getting their own home or risking that interest rates stay as low as they had for the last 12 years. Their friends had bought houses and made money, they were going backwards. Were you ever in that position? Easy to criticise when you probably bought your own home easily without having to take a massive gamble.
I have relatives who bought their first home on DTI less than 1. Both working in IT in the 1990s, and first home price just over $100k.
Different kettle of fish in those days, so it'd be hard for folk such as them to criticise young folk who overextend unless they completely lacked self-awareness.
So what does it mean to be keeping a close eye on the outcomes of the rate hikes exactly?
Probably, in my opinion
- Offering advice and budgeting tips to those who have had mortgages for a number of years already and who rode the wave down as interest rates got better and better. They will be OK, but if they ignored the advice to "keep your repayments steady" then they won't be accustomed to the necessary spending habits.
- Collecting real statistics on recent purchasers with oversized mortgages - I'd like to see real numbers attached to the hype on the suffering of FHB and the mad over-leveraged that is coming our way this year.
And the downstream outcome on the economy that I mostly care about is... the building industry - last time houses dipped and builders became an unenvied profession it took 12 years for our ability to build houses to recover. (Hoping to see a politician who recognizes this risk)
Can I upvote this more than once?
A lot of commenters on here are hoping for falls of 50% with no regard to the consequences. One of which will be the complete destruction of our building industry.
There is going to be a difficult balance ahead. Push rates up too high, too quickly and there will be a recession. I suppose that will help to combat inflation, maybe that's what Orr is trying to do?
The necessary response and the one that worked for New Zealand in the past was for the government to be the employer and trainer of last resort for builders and other tradies, through the toughest times. We could do that through existing agencies - e.g. Kainga Ora. Or we could come up with some fancy ministry of something or other. Maybe call it a Ministry of...Work? Ministry of Works? Something like that, has a certain ring to it.
It played a significant role in smoothing supply of both infrastructure and skilled tradespeople and engineers during hard times.
I do think the consequences will partially hit those who have been riding the unsustainable ponzi wave, right in the goolies, just like so many commenters said would (and needs to) happen.
The longer term effects could be messy, and hard to predict - are we good enough to bounce back quickly as a nation? Probably not with Luxon or the unpopular Ardern in change.
Big falls only really affect those who bought in the past year.
We can't protect people from folly, and we should not care to protect those hurt on the way down any more than we should guarantee there will always be profits to make on the way up. Or guaranteing against anyone making mistakes on any private finance adventure.
Anyone with half a brain could see were this was heading.
A correction is needed and healthy.
But big falls have far wider economic implications than just affecting buyers who bought in 2021. Many sectors of the economy will slump and unemployment will likely rise above 9-10%.
Those older than say 47 will remember high unemployment, and remember that it’s not good…
Disagree. Recent gains have been over pumped by a suger debt rush. Only companies that have been clipping the ticket or in need of speculative gains will suffer failures and those are precisely the ones we can do with less of.
Market corrections are healthy and inevitable, but so long as you are not overly leveraged, and know how to live within means there is no issue.
Will it affect everyday behaviour? Sure. But its not apocalyptic. Why do we need growth for growths sake?
Any slow down was likely always baked in anyway re long term debt cycles at play and the construction industry for example is going to struggle anyway with inflationary pressures.
Also unemployment is very low right now and we are not importing hordes of skilled workers any time soon. So don't see the high unemployment you factor in. Why open the floodgates if no one has a job. That's another lever that can be controlled.
In fact this is precisely why I do see the rbnz with the potential to raise rates higher than expected. Cause they can.
Even if it is bad bad, like gfc bad. It's still not too bad. I was contracting in the UK 2007/9. I had to fight tooth and nail to land work, but Its not so bad. You learn to adapt. People live on, learn lessons etc.
My parents brought me up in the 80s learning to live off the smell of an oily rag. You grow vegetables and shop 2nd hand.
I mean your not out buying new Ford raptors, but again I think we need a reset. We are far too comfortable in our consumption.
'Only companies that have been clipping the ticket or in need of speculative gains will suffer failures and those are precisely the ones we can do with less of.'
I don't really agree with this, although it's true to a point. I can think of a number of builders and developers who haven't been especially speculative, but will go out of business because of a combination of soaring input costs, rising costs of finance, and falling house prices.
Why does it have to be one or the other. Boom or bust? Taking the OCR to say 2% will suck plenty of demand out of the economy without destroying it. Taking the OCR to 3% or higher will crash the economy and result in damaging levels of unemployment.
Again, I don't get the extreme views on this.
What about businesses that depend on disposable income, and their suppliers, and their suppliers' suppliers etc etc.
Think hospitality, entertainment, and basically anything a household buys other than accomodation and sustainence.
What happens to the employees when the amount of work halves?
Consumer spending drives a big chunk of the economy.
Yes, but consumer spending that is driven by ever increasing debt levels (aka "the wealth effect") is never sustainable.
The party always had to end at some point. We can't just keep borrowing more and more money on houses to buy flat whites and new cars forever. Debt fueled spending always had to end at some point.
I agree a correction is healthy. We already have a correction. We are just about to enter crash territory, beyond a correction.
This could lead to a deflationary spiral that goes well beyond wiping out overleveraged house buyers and companies on the fringe of the property market. It could lead to a banking crisis. Unlike the European Union in 2008,we have nobody to bail us out. Our banks' balance sheets contain a very high percentage of mortgages, as we have little lending for industry in New Zealand (there is not much industry).
This is dangerous. The right thing to do in a market correction is to not raise interest rates. Otherwise, we could see a collapse scenario like in the early 1930ies in Germany, where banks raised interest rates into a stock market crash. This led to banking failures, then mass unemployment, then to political radicalisation with a wiped out middle class, then to war.
A better outcome would be a 1970ies style stagflation. In any case, the debt party is over.
The building industry is facing significant issues due to general inflationary pressures. Cost of everything. But its the same industry that has been happy to lap up debt fueled profits for the last 20 years.
Also. 40% off peak only really affects high leveraged transactions completed in the last year.
Solid businesses run by experienced professionals, prudent households etc will be just fine.
We need a reset, both in borrowing habits, and our general attitude to what should be normal.
This is the market sending a signal that something is wrong with what we're building or how we're building.
Perhaps this indicates over regulation? It might also force the duopoly to ease up on prices and surrender some of their profits. Councils may need to reduce consent fees, or face that line of income dwindling to nothing.
It is absolutely essential that there is no intervention to maintain the status quo. The market must be allowed to correct and burn off the dead wood. The good news is, I don't think this inept government or its reserve bank side kick is capable of intervention now. The wave of inflation they've supported is coming.
Totally agree. A 50% price crash would be a disaster, on an overall ‘net’ basis. If you don’t own a home it seems like a nice fantasy, but then you need to think of the economic and social destruction that would eventuate.
Even a 35% fall would be very bad.
I wish for a 20% fall and then flatness. Although it doesn’t mean anything what I wish for. What will be will be.
People in Auckland over paid by 50% too 60% for small 3 bedroom on tiny lot million plus 12 x average wage earners couple KJeld if you didn’t realise the market was a bubble you must have never seen one before.it done now price will continue to spiral down for a number of years.lesson is if you gamble on crazy things likelihood is you will get burnt.
Maybe it needs to be destroyed? It is bloated and inefficient from excess credit.
We build one-off, large, high-spec homes on over priced land using teams of sole traders with varying skills and abilities. We're hand crafting unreliable Aston Martins when we should be turning out Tesla Model 3s with repeatable, efficient processes.
I think the building industry is in its death throes right now, we just can't recognise it yet as builders are finishing jobs booked in the last year or so. All builders are hoarding product and many now take an entire day off per week to go around every hardware store to buy up as much product as possible as it is being rationed by retailers. Retailers who are also cashing in but facing steeper supply chain and product costs themselves. Consequently we have building costs skyrocketing, quotes in the $5000 per sq m are starting to happen, right as the ability for customers to pay these prices are diminishing with interest rate rises.
I expect to see a LOT of section sales coming up with plans attached, simply people having planned but unable to afford the project with banks unwilling to lend. And why would banks lend with house prices dropping, the final product may be worth less than the cost to build, PLUS the customer may not be able to pay the mortgage.
This is why the GOVT needs to push ahead with funding big infrastructure projects, despite protests that spending might increase inflation. They might be able to save some of our construction industry and make the most of spare capacity there as home building crumbles.
Sorry, but it is simple. Machinery identical although different scale: excavators, compactors, concrete formwork and placing, rebar placing and tying, crane direction, scaff, trucking. Specialist training maybe for crane, dozer, loader, scraper operation. But driving a rock truck, dumper, roller- half a day tops.
Fair enough, I replied in a rush on the train. Your point is the $ that has to be paid relative to Auckland being far from a 'World City' (but a quite nice city, even if a 'backwater').
By comparison - Brissy is also a nice city, far from a World City as well, but you are paying a much more sane price for the housing by comparison to Auckland.
Still importance is given to some household who may have overstreched instead of average Kiwi who is struggling with inflation. Overall household budget without mortage also has gone up by 20% to 30% though inflation data with all exclusion to suit vested interest will be at 7% or 8%.
WHY the emphasis to protect speculators over common people. FHB who have bought are in for long run so should be fine unless have manipulated and over stretched under FOMO.
The bankers, real estate industry, media and politicians should all hang their heads in shame.
They have championed this ridiculous ponzi bloated mess for a decade or more.
Those who called it out (self included) were mocked as doomsters.
Now look at the almighty great mess we are in.
Now the same morons will try and solve it with...................immigration.
As a mort free home owner with other assets and so forth I am totally p###d off our country has taken an almighty dump on the next generation
That is not what my father's generation did...they were prepared to die in a trench for us.
This lot want to die of over indulgence.
The situation across the anglosphere aligns with the generational theory of the 4th Turning. The children of the Greatest Generation are the darkside/shadow personality traits of their parents.
The greatest generation viewed social stability as the most important factor, and they raised the 'me generation' who view/ed self as more important than society.
Hence the last 20-30 years, while we've had boomers in change of large parts of society, its all turned into a bit of a mess.
Its quite possible that we won't see meaningful change until the boomers are dribbling into their pj's at the summerset village....as they view what is good for them personally, more important than what is good for society as a whole.
its certainly why our public services are struggling -- the days where people goign into nursing, teaching, healthcare in general -- were admired and looked up to -- yes the pay was a bit iffy -- but the respect for contributing to society was huge -- now -- those industries are not looked on the same way -- and our younger generations no longer want a career in them -- its build an app -- buy 6 houses -- follow the money !
as a 53yr old health professional -- about to cut back to 15 hours a week -- i am seeing a huge number of my peers doing teh same -- cutting back -- retiring early -- or simply going on long term adult OE's !
Our health system is crumbling -- and the reforms -- bascially back to four regional health authorities -- are already causing massive disruption and chaos to a workforce swamped by 2 years of covid --
7% inflation and 5 % mortgage rates -- are not the biggest challenge we face --- its the dismantling of our public services in the next 2 years -- which will cause the real issues-- we can tame inflation -- might be painful might have a recession --- but we will never be able to rebuild our healthsystem and re staff it
How come we get all this hand-wringing about mortgage rates, when nobody gave a toss about the pressure that was put on renters these last few years?
I don't recall seeing any interest.co articles about the terrible financial pressure that renters are under. Noooooo. Renters are fair game. Put up the rents and everyone thinks you are an investing genius hero. Nobody says a bad word. Let the renter's kids go hungry, who cares?
But as soon as mortgage rate increases start there is much hand wringing and wailing and gnashing of teeth.
It would be argued that the landlord took the risk by taking out the mortgage....but then again its been shown that property is a risk free asset given the bailouts from government/rbnz over the last 14 years (GFC - now).
We are possibly at a turning point now though where neither will be in a position to come to the rescue of landlords....who might finally see what the meaning of risk and return really is....
Then again...we might just see another bailout and further deterioration of the financial and social stability of the country.
The future is becoming a little clearer to my mind - and it's bleak. Here are my ramblings......
The OCR and mortgage rates are going to continue to rise, but because these interventions are too late they will collide with stark negative economic data in the next 9-12 months. This collision will accelerate the housing wealth effect of the last two years being reversed. Sentiment and confidence will be eviscerated causing a dramatic "overshoot" in property value correction to perhaps circa 2016 values by early 2023.
Continued inflation, limited access to expensive credit coupled with a reversal in asset values will mean an economic cliff is approaching rather than a predictable negative gradient, and there will be a shock to domestic economic activity.
The late OCR intervention will be Orr's ultimate on doing. Long before inflation has been brought to heel economic havoc will force a re-think on the OCR direction. However, not enough base point rises will have been banked to allow the RBNZ to remove the "brake" as it will never have been meaningfully applied. Inflationary pressures will still remain significant and not enough would have been achieved in the short time the OCR was being raised keeping this as a continuing thorn in the side of the RBNZ.
The outcome will be stagflation by Q4, with an impotent, stranded OCR. A stalemate between economic contraction and the "thief in our pockets". This will cause a drawn out and painful recession as our economy goes through the economic withdrawal symptoms necessary to reset (also prompting a change in Government).
I really do hope I've read the tea leaves wrong. Keen to hear the constructive criticism of sharper, and better read economists on interest (of which there are many) to comfort my cynicism.
Do you think any OCR could quell these "supply-side shocks" ?
I.e. if the OCR was 10%, and demand for new builds vanished, would wallboards be more available/affordable? Or does the pipeline of forward commitments mean today's changes won't impact the market for 6 months and the pain will happen anyway?
Poldark, 100% agree. Targeting demand side inflation with OCR is throwing solutions at the wrong problem. However, the stimulation has to be removed. The problem I see coming is that soon 1.5% will still not be stimulatory so the proposed target of 3.4% will be so hard on the brakes we just won't get up there.
I think you ticked all the boxes though, with the exact order TBA. Rates up and up, inflation up, developers down and some out, asset prices down, Speculators will moan, Govt will change, as well as RBNZ Governor.
Summary no soft landing, or even hard landing - its increasingly looking like a crash landing.
Only a few short years ago this tactic of ever increasing house prices and debt was "a good problem to have" and "a sign of our success". How'd we ever go so long thinking such stupid economic, tax and housing policy was the way to go? Just basic entitlement mentality overriding good judgement?
Great comment.
As you probably know, I'm not a fan of the OCR going any higher than about 2%, I think the cons will well outweigh the pros, it's largely using the wrong tool for the problem (which is much more supply side than demand side), but I think it will be done anyway.
The RBNZ was dumb in slashing the OCR so far, and will be dumb in hiking it.
I also see a lot of pain coming. It's going to be like a very slow motion train crash. Certainly will take months and months for the pain to be fully realised. Interestingly, in literally the past 1-2 weeks I'm starting to suddenly hear more and more acquaintances worry about the economy, mortgage rates etc. Almost heard none of this even one month ago.
Where I differ is I definitely don't see prices falling to 2016 levels. I can definitely see the possibility of 25-30% falls, however, especially if the OCR is hiked to 3% or more.
And I completely agree on late OCR intervention being Orr's downfall. Few people on this website dispute that he should have been hiking the OCR, slowly, from early/mid 2021.
Orr, and this government, will not be remembered fondly.......... And that's why the clever senior people in the RBNZ have all got out, before the SHTF...
I think it's plausible. Timing is everything, and central banks have already waited too long to act on inflation.
The nature of our bubble leaves us vulnerable. Let's say that we get a few more rate hikes, and by the end of the year RE is properly tanking. Once that momentum starts, the fear will set in, and even hasty cuts to the OCR won't restore confidence. It's entirely possible that we'll still be seeing high inflation at that point, especially if overseas markets haven't tanked yet. That will limit the ability to cut without destroying the $NZ and exacerbating the inflation problem.
The unpredictable factor is gov't intervention. I mean, it's predictable that they will (Labour or National) intervene if RE is tanking. But the nature and scale of that intervention is hard to predict. I do think that National, in particular, will be willing to sacrifice anything up to and including national sovereignty and the credibility of the currency to halt a >20% property correction. So who knows?
So many New Zealanders are financially illiterate. It was screaming “we are on emergency interest rates.”
Greed got the better of so many however. We are entering times that so many have never seen before. Property prices dropping, interest rates going up and all our other day to day costs are rising also. Many will be saying I wish I had not borrowed so much including investors, developers and first home buyers. The question I ask. Why didn’t you see the inevitable? Interest rates had to come off emergency levels at some stage. Economics 101.
Everywhere you look in New Zealand there are so many new listings coming on the market. Many of them are crappy ex rentals so good luck. Those who were not greedy will be happy they did not participate in the great fraud perpetuated by so many who had a finial interest in the outcome. Buying that dump because your money was doing nothing in the bank will be disastrous for some.
Development took deposits in 2017 and is still an estimated 18-24 months away from completion because their design and consent process took them too long. That's a long time. And costs have risen in those 5 years since 2017 and Erson Developments has insufficient money to complete the project...
This comment made above "What could or should the Government do? Good question. But if this Government stays true to form anything it comes up with will be late and reactive." is sadly SPOT ON. There will be plenty of sellers but there wont be many buyers.>>> thanks to the recent silly and haphazardly changed long standing and sensible tax laws such as interest deductibility for borrowings to create taxable income, resulting in total slump in the housing market and subsequent tanking of economy. Dont worry, Luxon is on his way to clean this mess.
Sounds like a hankering for a Luxon-led bailout and investors to be allowed to freeload while working Kiwis pay the bulk of taxes that fund society once more.
But it was this sort of tax privileging and welfare subsidised, risk-protected treatment of investment property that got us to this point of a massive debt bubble. More of the same coddling won't make New Zealand better...
This comment made above "What could or should the Government do? Good question. But if this Government stays true to form anything it comes up with will be late and reactive." is sadly SPOT ON. There will be plenty of sellers but there wont be many buyers.>>> thanks to the recent silly and haphazardly changed long standing and sensible tax laws such as interest deductibility for borrowings to create taxable income, resulting in total slump in the housing market and subsequent tanking of economy. Dont worry, Luxon is on his way to clean this mess.
I think most people will be able to handle the increase in interest rates as they are not huge (of course dependant of the size of mortgage), its the inflation that's the kicker which will hurt the most as its in everyday expenses/items and it could take a long time for it to get under control and removed.
The government has backed themselves into a corner with the reduction of fuel costs. Looks like when the tax is put back on its in one go and that's going to hurt. There will be a expectation that they delay adding this back.
The other big issue is the RBNZ and the Government are too slow to act as per usual. Once things start going south they will take too long to act and wont be able to stop it or do enough. I think Orr dosnt have any tools in his pocket or cleaver ideas apart to follow the past and send us into a recession because as least he knows inflation will get undercontrol.
Over the last few years many commentators on the housing market, including economists, stopped warning people that house prices could fall, or even pointing to the unmistakable signs house prices were unsustainable. Instead they started to say things like, the government will never let house prices drop. Leading FHB and other naive buyers to actually believe that house prices in New Zealand would actually keep going up for ever. In my view FOMO was partially stoked by these people. And I’m not talking about spruikers like Ashley Church.
Even now, I am hearing "property coaches" telling wannabe investors that now is a great time to buy and pick up a bargain.
Supposedly you can buy an average house for 100-200k below the peak 6 months ago, so it must be a great deal.
In 6 months time if prices fall further, then they will be saying it's an even better time to buy.
That is because of our strange kiwi psychology where if you say that house prices might fall, it means that you have a bad attitude and therefore need to get publicly covered in tar and feathers and generally shamed - "everyone...this guy thinks at some point there's a possibility of a housing (correction/crash)....he's such a doom gloom merchant!"
Having lived abroad a decent amount of time...I find NZer's quite a strange bunch despite having grown up here.
The acknowledgement and discussion of risk makes you a loser (apparently..) as opposed to having the ability to view possible outcomes with a weighted probability view.
Absolutely. Most evident in our sporting culture, but also applies to the current economical outlook and the housing market. We cannot lose, and if we do it's all x politician x economists fault. Meanwhile, let's belittle each other on an independent news website over who made which prediction about what when.
Quite interesting being an observer of these threads. Some very informative information. Also a lot of arguing over who made how much by cutting down what type of trees where.
Success investing in the housing market has been nothing but good fortune so far, but by gosh have we worked hard for it!
By "we" I mean the renter..
You talk to the average person in NZ who is 50+ and they will tell you to generally not to invest in the sharemarket because of what happen in 1987 (and those people influence the views of their genX/millennial children).
But that same person will double down on investment property because its never had a significant correction/crash in their lifetime.
So it appears that you can't view fundamentals and animal spirits to determine whether something is overpriced and at risk of falling...instead you use confirmation/recency bias to determine what is most probable to happen next.
Yep! I’ve heard all about the stock market crash and how “all our savings were wiped out” and how it’s a bad idea to invest in xyz. Then in the same conversation comes the sentiment that “house prices never go down by more than 1 or 2%”. Have heard FHBs been given advice that a “small suburban section for $600,000 in Wellington is a bargain!”… I hope they didn’t take that advice…
You’re right, too much retrospective investing. It makes the market interesting at least as it always goes up, until it doesn’t.
No, no, no David, you don't understand... To tackle a cost of living crisis, you have to hike up interest rates aggressively to force the Saudis to lower the price of oil, persuade Putin to pull out of Ukraine, and persuade Fonterra to sell stuff cheaper to us than they can sell it abroad. Oh, and, errrm, something about the money supply I read on investopedia that seemed relevant.
In any case, if people have to pay hundreds of dollars extra on their mortgage, this actually makes no difference to their cost of living at all... because we don't include mortgage interest payments in the CPI. Clever eh?
Hmm, let me see.... I am a landlord and my bloody interest costs have gone up loads and the newspapers are full of inflation stories. Shall I (a) help renters out with rising prices by reducing or freezing rent; or, (b) give my heartfelt condolences to my tenants and put rents up by as much as I can to recoup my margins.
Clue: rents (flow) are running at 5.7% year on year as of March 2022.
Trick question!
(c) Sell the house.
If the cost of the investment can not be covered while maintaining an affordable rate at which the tenants can get by in the household, then the investment cannot be afforded. I don't know why this is lost on so many people in this country. Markets and rates go up and down, it's the landlords responsibility to cover those risks. We have somehow been able to shuffle those costs on to the renter and wash our hands clean for so long, and still manage to find strength to point the finger at the poor as if it's their fault they can't afford to live here.
As an investor, if the rising rates are putting you out, then you're too highly leveraged and that's not the tenants problem.
Sell the house.
Then, sorry, please forgive my sarcastic answer. Yes, that feedback loop absolutely exists.
My personal view is that when Adrian was saying that the Govt also needed to use fiscal measures to tackle high prices, he was not talking about cutting Govt spending as has been widely reported, rather investments in things that will make things cheaper (or at least stop prices increasing further). Maybe Adrian is sick of paying over the odds at New World too?
Well no, apparently landlords work on a cost plus basis. For example, if you had 2 landlords with identical properties in the same street, one is mortgage free and the other has a mortgage outgoing of $200 per week. The property with the mortgage will be exactly $200 per week more than the mortgage free property.
Inflation is a sustained and broad increase in the prices that people pay for things - including mortgage payments.
The only reason that mortgage costs are not included in CPI is because of the feedback loop - i.e. increases to the OCR put upwards pressure on mortgage rates.
But they would have a feedback loop via mortgage costs that are passed through to rents. Which appears to be the default view of landlords I talk to...they're like "my mortgage rates are going up so I'm just going to increase rents to cover the expense".
That is measured in CPI (although only proportionally as not everyone is a renter)....but it will still have some feedback type influence if landlords collectively chose that mentality.
The question then would become...who cracks first...the renter or the landlord (or the economy, or the RBNZ).
OK well I'm a saver and have no debt, and because interest rates are rising, I get more return on my savings. Which reduces my cost of living.
Therefore it's an important distinction to say you're tackling inflation, rather than directly helping cost of living, because it's going to help some and hinder others, depending on their situation.
Having a mortgage is like riding a motorbike naked, the higher the interest rate the faster you go, the bigger the mortgage the longer you ride for.
The longer you ride for, the greater the chance of being hit by insects, stones, wet weather and gravel roads.
Hopefully you don't go fast and don't ride for long and don't come off.
People must of realised that rates would not be at emergency levels for long banks should of informed them it would be crazy to buy if they could not afford to pay with higher interest rates, this is choice they made pushing house prices up with FOMO. And bad financial advice the market will find a footing when average wage earners can afford to buy around 50% too 60% down from high.
There's enough money sloshing around in the system for everyone to be comfortable here.
Wages need to rise. Period.
100k salary in the year 2000 is equivalent to 200k+ in 2022.
House prices haven't gone up, the dollar has gone down. Give people more so they can pay for their $3 petrol and $15 '$5' Big Mac Combos.
Raising wages will be highly inflationary and require even further intervention from central banks.
Think I remember an article from the ECB pleading for businesses not to raise wages as this will only make inflation worse....and put central bankers in an even worse position.
So I'd imagine that Orr and his team is hoping like hell that they don't see sustained wage increases as well.
But they're happen to create financial repression by setting the OCR about 6% below the measured inflation rate in the interim and squeeze everyone until something breaks.
Given the huge cost pressures placed on households, first with massive mortgages, now with rising rates and runaway inflation, I'm failing to see what other answer there is - unless workers are expected to keep taking the squeeze but pay rises are suddenly off the table for some greater good.
Can't pay my grocery bill with that, unfortunately.
Yes agree - if the focus is on inflation (keeping employment in mind...), then rates should continue to rise in the same manner that they were dropped probably past the point where we have maximum sustainable employment (is the current level sustainable?....any other time unemployment was this low is prior to recessions and crashes as the economy is over stimulated).
Now comes the question of moral hazard.
This underpinning of a dysfunctional system by successive Govts. is what has led us to this point, 'Just one more cracker Mr. Cresote.'
There needs to be a Govt. response, ie a change to Govt. policy, but it needs to happen after this bomb has gone completely off, to reset policy at the bottom of a bust cycle so we do not get a boom rinse, and repeat.
This would involve helping those with lost equity, but not the lost debt they have to pay off, some form of limited tax deductibility over time, so while they are not rewarded for a poor choice (the moral hazard), they are no so heavily indebted (given that the house equity was there main retirement nest egg) that they become Govt. welfare dependent on retirement anyway.
If money is going to be spent, then at least spend it on getting rid of the bad and implementing a policy that will give us truly affordable housing where the market is stable over time - just like some other jurisdictions are already doing.
No bloody way we should "help" those with lost equity.
If they are worried about a crash they should man up and sell now.
Never seen you worried about all the hundreds of thousands of bloody dollars that renters have "lost" over the last few years.
People need to man up and make sensible decisions. Moral hazard.
"People need to man up and make sensible decisions."
Aka: Please ignore the enormous amount of political and financial capital used to spike house prices to the point where breaking out of renting required taking on a stonking debt and strong signals that this was the preferred state of affairs, because I want to be a bolshy dick and act like year 15 of a traditional economic cycle is a realistic time-frame for people to sit on the sidelines and wait for the correction our entire governance structure bent over backwards to never let happen, until several confluent external shocks unwound everything and took it out of their hands.
Maybe the 'sensible decision' is to not try and lay the blame at an individual level when the entire functioning of this country has been about enriching property investors because real estate was too big and politically sensitive to fail.
Hey GV, you big sissy. Newsflash for you THE CRASH HASN'T HAPPENED YET.
You are on here all the time moaning "oh poor us, we bought a home and might lose money" and "somebody help us".
If you are worried about a bloody crash then sell! Don't sit there on your comfy home-owning high horse and demand "help" and bailouts when THE CRASH HASN'T EVEN REALLY STARTED YET and you could sell if you want to.
Man up. Make your own financial decisions and live by them. Nobody has been bailing out renters. Why do you think homeowners deserve "help"?. They can help themselves.
You have missed the point. The moral hazard is Govt. interference to stop the bust from happening.
I'm saying let it happen, or in reality, it is going to happen regardless, but when it does hit the bottom house price-wise, you need a plan to keep it there so it does not bounce back up again. As the end result would be that owners and renters will go through the same cycle again.
You as a renter can still buy at the bottom, but shouldn't expect to capital gains your wealth via your home from that point on.
The FHB with the debt doesn't get a free lunch, they still have to pay it back, or part thereof. This excess debt could be moved onto the Govt. books so the banks can still operate, and the homeowner can remain their client. If you don't do something like this, then the roll-on effect of personal defaults and businesses going under could be damaging to everyone, and the Govt. has to pick up the tab anyway. The money is still going to be spent, but one way would be for a truly affordable stable housing market to emerge, or just a rinse and repeat of the same.
But what this is not about is today's renters getting some sort of revenge on homeowners and the system by buying at the bottom of the market and then saying it is now their turn as new homeowners to ride the next boom wave and becoming the very person that future renters despise.
Real estate marketing and advertising works. Daily, weekly, monthly and yearly, the tsunami of hyperbolic articles that talk up the housing market, missing out, etc are so full on (along with the pages of listings) that a certain portion of the population will succumb. Also the rental market is brutal, which makes renting a tough 'choice' for those who don't own.
The wrong problem (raised interest rates) is being flagged. NZ insists on fixing mortgages for ridiculously short terms. Average first home buyers should be able to fix for 15-30 years without paying over the odds. The annual or biannual merry go round is the heart of the problem.
I just don't see the government allowing FHBs to be thrown out on their ears though. If there are more than a few mortgagee sales, it will become politically untenable very very quickly.
And so they will reduce the OCR to stop a property market crash. Yes I know the RBNZ set rates, and yes I know they are supposed to be independent, but if you believe that, man have I got a hot investment for you... it's my new crypto coin called "NaiveTrain" - it's going to the moon I tells ya.
Anyway, there just can't be large OCR increases beyond 2% or so. Too many people borrowed up to the eyeballs.
I agree with the author, we are facing a rolling mortgage earthquake. People don't tend to shout from the rooftop if they are in financial trouble.
Just a few months ago, the official cash rate was 0.25% - one sixth of the current level - with indications given it would stay low. Just a few months ago, first home-buyers were invited to buy as lending restrictions were removed.
These first home-buyers may now be in financial trouble if they followed what appeared to be an official invitation to buy. They will have a high percentage of debt if they took advantage of the removed lending restrictions. The interest rate on that debt will now have increased substantially as the official cash rate has gone up six-fold. At the same time, their small amount of equity will have been wiped out by a property market correction (not a crash, as yet).
So some first home-buyers must feel trapped and officially deceived by political decisions that were made just a few months ago.
Our country is about to face a serious liquidity crisis that could spill over from the property market to widespread recession and loss of investor/consumer confidence.
I am convinced it was a mistake to raise our official cash rate from 1.0% to 1.5%, when Australia's rate remains stable at just 0.1%. Australia seems to fare much better these days, with less economic woes compared to us. This is not only due to Australia being commodity-rich, but also due to our Reserve Bank having made a crucial mistake this month by raising interest rates steeply, into an already falling property market.
Mistakes can be corrected. To accept that and to be able to stand corrected is in fact a sign of true greatness and humility.
I hope our Reserve Bank will stop to try to robotically maintain the consumer price inflation rate below 3%. It is impossible to achieve this anyway, in my opinion, as the world is facing serious challenges in terms of supply.
I hope our Reserve Bank will be able to admit a mistake, not via words, but with actions. I hope our Reserve Bank will discontinue raising interest rates when the economy is already showing serious signs of trouble, and perhaps reduce interest rates again to a level where our country's high levels of debt remain serviceable.
When I was young, and knew nothing, I read the average interest rate for NZ was 7.5%. So I have always done my mortgage affordability calculations on 7.5%. You'd have had to be really silly to think they were going to stay at 2-3% for a long portion of a 30 yr mortgage. Isn't it good that interest rates are coming back up? We only got through the GFC, ChCh earthquakes and COVID by having the ability to lower them. We can't keep going down so coming back up to give as a 'crisis buffer' must have a plus side. Sympathy for FHB of the past yr as they be the ones than suffer the most and made their decisions out of desperation rather than greed. But other than them, people in the past 10 yrs have been so rewarded for borrowing money, being highly leveraged and taking risks. People who were hard working savers who just chipped away at their mortgages have been really not rewarded. I think this is their time, things had to change, it was getting boring when money was more easily made from property speculating than most day jobs!.
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