Many weird and not exactly wonderful things have happened over the past 12 months.
One of the more curious developments, largely unnoticed, has been significant shrinking in importance of the Official Cash Rate (OCR).
Now, I know what you'll say. "What are you on about?" "Are we actually talking about anything else other than the OCR at the moment?" "How could the significance have reduced?" "Don't be ridiculous!"
Hear me out.
What's happened is that the importance of the actual, here and now, physical OCR has diminished considerably in favour of a spectral 'Future OCR'; that is, what the OCR might/could be - in the months and years ahead.
The physical level of the OCR in the here and now (for the record currently 2%) has taken a back seat in favour of this 'Future OCR' when it comes to pricing of wholesale and retail interest rates.
The 'market' is currently working in the mindset of an OCR of around 4% - not the actual 2% level the OCR is at now.
Without us really realising this was happening, this transformation began when the Reserve Bank (RBNZ) released its Monetary Policy Statement on May 26,2021. This MPS reinstated - for the first time since the start of the pandemic in early 2020 - the forward projection of the OCR usually contained at the back of the publication. Just some dates and numbers and the RBNZ's best guess at what the level of the cash rate might be in future.
The particularly interesting thing about the May 2021 MPS was that the commentary in it was not much changed from the sort of commentary seen since the outbreak of the pandemic - IE very cautious, uncertainty, slow recovery etc. But everybody was blown away when it came to reading the OCR projections.
Bear in mind, at the time the cash rate was still sitting on the 0.25% emergency level that it had been dropped to in March 2020. And also bear in mind it had been not many months before that the RBNZ had been pointing very strongly toward the prospect of NEGATIVE interest rates.
Yet, now, here it was in all its glory. A newly minted OCR rate track that showed INTEREST RATES GOING UP! And how. The RBNZ forecast that the cash rate was going to climb to, wait for it, 1.75% - by June 2024 (as opposed to the 'real' 2.0% we've got two whole years earlier!). But financial markets then were gobsmacked. And this kicked off sharp rises in wholesale interest rates, which were then further kicked on by global inflationary developments. Before very long mortgage rates started to move up. Strongly.
By the time the RBNZ actually lifted the OCR from 0.25% to 0.5% in October 2021, average one-year fixed mortgage rates had already climbed by 38 basis points compared with May 2021, while the two-year rates were up 61 basis points - this before the OCR had been touched.
This pattern has continued since. The OCR rate track, the spectral 'Future OCR' has become more important than the physical cash rate. Global developments have kicked in as well. Mortgage rates have soared at a far more rapid rate than surely anybody could have foreseen.
There's some irony in all this. What we are seeing is actually very back to the future. We're now seeing monetary conditions and retail interest rates set much more in 'the way they used to be' by the RBNZ.
You see, prior to introduction of the OCR in early 1999, the RBNZ used a number of 'raised eyebrow' methods and mechanisms to influence monetary conditions. According to the public announcement at the time in 1999, the rationale for introduction of the OCR was that "...by directly managing the market cash rate, we will be able to influence the level of other short-term interest rates and, hence, monetary conditions more generally..."
And so it was that from that point on if the RBNZ wanted to tighten or loosen monetary conditions it moved the OCR. So, this was the RBNZ effecting change in the markets with a physical, rather than signalled move.
So, no 'raised eyebrow' projections then?
Well, until 2016 the RBNZ did a sort of 'raised eyebrow' special in that it ran in its MPS documents projections of what it thought the 90-day bank bill rate might be in the months and years ahead. Now the 90-day bank bill rate is not the OCR of course, but its IS very heavily influenced by the level of the OCR. So the bill rate projection was a kind of proxy for the OCR. All the market observers needed to do was subtract say 20 or 30 basis points from the bill rate projections to get some idea of what the OCR could possibly be in future. All very oblique though.
But in 2016 the bullet was bitten and proper forecasts of the OCR commenced.
And now very clearly this forward cash rate track has been picked up by the RBNZ as the weapon of choice to use in the current environment and is the thing to be watched - more so than the actual movements of the OCR itself.
I will let you into a secret. When reporting on the latest Monetary Policy Statement for interest.co.nz on May 25, 2022 I had cheated and already pre-written my 'breaking headline' for the website ahead of the release of the MPS - so confident was I that a 50 basis point rise in the OCR would be announced.
When the statement emerged at 2pm, I glanced at the OCR figure, reflexively pushed the button to publish the pre-written 'breaking headline', and then immediately buried my nose in the OCR forward track projections, nearly falling off my chair when I saw what they were. The market reaction (IE falling off chairs) was fairly similar.
So, a 3.9% OCR by the middle of next year? Really?
I've seen it suggested that RBNZ Governor Adrian Orr is bluffing. And that he and the RBNZ Monetary Policy Committee won't lift the rate that high.
So is it a bluff?
No. Absolutely not.
Why bluff and say you will do something you don't intend to do when there's a reasonable chance that bluff will be called?
What we are seeing is the RBNZ basically saying that it wants its efforts to quash inflation to be taken seriously.
And if that means a 3.9% OCR is needed then that's what it will do.
If you make a strong statement of intent, you've always got to be prepared to go through with it. But it doesn't mean you can't change your mind if actual circumstances dictate.
So, by that token, WILL the OCR go to 3.9%?
Well, it entirely depends on inflation expectations.
Yes, that's right it doesn't depend on inflation - 'real' inflation.
It depends on 'inflation expectations' - what people think might happen with inflation.
What we've got here is a spectral Future OCR taking on a spectral Future Inflation. Which is all a bit weird really and possibly, just possibly, not that sensible.
The RBNZ places a lot of weight/emphasis on its own survey of expectations, through which a group of economists, forecasters and senior business types are surveyed for their views on future inflation.
For reasons that escape me quite a few economists sharply played down the results of the last survey. I really couldn't understand that. The survey participants were surveyed days after the RBNZ had hiked the OCR (the real one!) by 50 points. If that didn't tell those surveyed that the RBNZ was serious about cutting off inflation, what would? And yet, just days after this, the survey participants hiked their collective expectation of inflation in FIVE YEARS' TIME to 2.42% from 2.3% previously.
So, in other words the RBNZ had just thumped out a monster rise in interest rates - but informed market participants were still thinking, even after this, that inflation was not going to be properly under control in 60 months' time (bearing in mind the RBNZ explicitly targets inflation at 2%).
So, the participants were saying: "Is that all you got?"
Well, Orr has come right back at them and is now saying that there's plenty more where that came from - unless people behave. In other words, stop expecting inflation, you bad people.
The rhetoric from the RBNZ has been such that another 50 basis point rise in the OCR on July 13 (next review date) is a slam dunk. I've already written my breaking headline.
Of MUCH more interest is what happens when the next RBNZ survey of expectations is released on August 8. I'm betting that 'Future inflation' will back off. Which means I think all bets will be off for what happens next physically with the OCR. And potentially also that 'Future OCR'. (There's another OCR review and MPS issue on August 17.)
A further wrinkle in all this is that I'm still not sure the RBNZ is quite (yet) fully aware of just how much bang it is getting for its buck with the OCR hikes (real and projected).
According to RBNZ figures, as of April there was nearly $297 billion worth of fixed-rate mortgages around the country. Of this, $239 billion (just over 80%) was due to reset within two years. Well over half of the money ($160 billion) was due for a reset within 12 months.
These rate rises are carrying enormous firepower.
A quick example, using the trusty interest.co.nz calculator: Please don't feel picked on Kiwibank, but I will use your one-year 'special' rate for this example as it was raised this week to an (at time of writing) market leading (for specials) of 4.85%. At the end of May last year Kiwibank's one-year special was 2.35%.
In May last year the average-sized new mortgage (according to RBNZ figures) was $329,000. So, using the Kiwibank rate of 2.35% on a 30-year mortgage would have meant payments of $1274. If this imaginary customer were to today reset this mortgage for another year they will be paying $1736 a month. That's a rise in payments of 36%. On a weekly basis it would mean over $100 EXTRA a week.
The RBNZ has suggested that even the short-term fixed mortgages are heading for 6%. On that basis our mortgage customer would then be paying $1973 a month, a rise of 55% on what they were paying in May last year and on a weekly basis some $160 more.
I did an Auckland-esque example using a $900,000 Auckland-sized mortgage as well, but I've decided the results were too frightening to detail here. Suffice it to say my sympathies are with the people who will be in that boat.
But sooner or later the impact of these 'Future OCR'-fuelled interest rate rises will become all too obvious.
The economy is going to grind to halt. Don't doubt that. But will inflation, actual inflation, come down? Personally I fear that with the latest supply chain ructions out of China and the probably still to be fully-felt effects of the Ukraine invasion we may well see a second wave of inflation later this year.
At that point it becomes a matter of how committed the RBNZ really will be to killing inflation at all costs. The risks of killing everything else are very real.
So, an OCR of 3.9% next year? I wouldn't bet against it. But I wouldn't imagine it would be a hell of a lot of fun if we get there either.
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134 Comments
Of course the value of the NZD has a massive weighting on OCR decisions and with Oil prices potentially heading to $150, protecting the dollar from sliding further helps protect from the broad inflationary impact of rising energy prices.
Agreed. That's why credit creation-driven property bubbles are generally not good for an economy. There's a trade off when you goose the currency by increasing the OCR.
I remember probably less than 10 years ago when the OCR appeared to be dropped to helped exporters. The NZ dollar can be directly stronger or weaker as a direct result of OCR changes and the knock on effects of it. The problem NZ has is that even in the good times we kept dropping the OCR, rather than moving it back up to a more neutral level. Even now it is historically very very low. Now it is very hard to raise it.
If you make a strong statement of intent, you've always got to be prepared to go through with it. But it doesn't mean you can't change your mind if actual circumstances dictate.
I think Orr intends to continue to raise the OCR but I think he also knows in the back of his mind circumstances will prevent this from happening... whether it be another out break of covid and/or the economy simply grinding to hault, it won't be possible.
If like many suggested here 18mths ago they started lifting the OCR off the emergency rates, we could be somewhere where we are now, around the 2% OCR but not be looking desperate and super reactive.
Now the other international forces are more impactful as we were already so far behind the curve.
Just dumb policy!
There will likely be spillover as well. My feeling is that government have substantially underestimated the financial support that will be required and will end up throwing the May budget away by the start of next year.
For a decade I've been saying 'invest in infrastructure' now I'm saying that it's time to give ourselves as much headroom as possible.
Agreed. I read an academic article that showed that the financial markets (through the difference in yields between inflation protected bonds and nominals bonds i.e. the break even inflation rate) was the best (if not perfect) predictor of future inflation. Makes sense but suspect in the NZ case, the lack of a vibrant market for inflation linked bonds would dilute that finding.
Good article. One can't help but lament the alternate path where RBNZ broke their crystal ball so didn't sit on their hands talking about "transitory inflation", but instead got on with the job of setting appropriate rates.
Consumers don't read RBNZs forward guidance. Only consumers experience will really convince them inflation is tamed again and that probably means holding inflation at or just under of the target band for a couple of years.
Are these two statements contradictory:
1. "I'm betting that 'Future inflation' will back off. "
and
2. "Personally I fear that with the latest supply chain ructions out of China and the probably still to be fully-felt effects of the Ukraine invasion we may well see a second wave of inflation later this year."
Surely if the RBNZ dont want to keep yo-yoing and want to give the market certainity then if theyalso see any chance a second wave of inflation (which is probably a >50% probability) then the OCR will not be coming down any time soon, in fact in might need to raise its future projection.
I am no expert, but isnt it vital to include discussion of how OCR changes impact other parts of the economy such as the exchange rate - we clearly cant afford the dollar to fall or our import costs will rise and people will struggle more to buy food and energy, leading ton less money to spend in the economy and a great recessionary effect for the poor and middle class. So if the OCR needs to rise to keep the exchange rate level then surely the house prices will just have to fall, and with them the cost of living should fall.. rents, buying houses etc?
From the article: "I did an Auckland-esque example using a $900,000 Auckland-sized mortgage as well, but I've decided the results were too frightening to detail here. Suffice it to say my sympathies are with the people who will be in that boat."
Can we have a conversation about the households that have 2, 3, 4 or more mortgages over investment properties?
The RBNZ used to report on mortgage concentration. But they have stopped doing that. The last report (4 years ago) said that 8% of households held 40% of the mortgage debt. Those households will be servicing total mortgages far larger than just $900,000. Many would have jumped in boots-and-all when the LVRs were removed. Many will hold mortgages over [already] negatively geared rentals.
This is the cohort that represents the greatest stability risk for the property market. The RBNZ should be reporting on debt concentration, so that we can know how big the problem is. Could interest.co.nz ask the RBNZ about this?
Raising interest rates and the phasing out of interest deduction, you can see why many landlords are raising their rents. They have no choice.
In the face of rapidly changing circumstances will labour consider pausing the phasing out of interest deductions? Might be a smart move as rents rises could be moderated, helping fight inflation.
Landlords could raise rents any time and most have done anywhere they can. They'll only be able to get what the market dictates, nothing to do with what their input costs are.
I assume the interest cost deductions were only temporary since they pushed them years in advance out to try to get investors not to take advantage of low interest rates in 2020... we all know government laws can change in an afternoon so if they were serious they would have eliminated interest deductions on the spot.
Try not to confuse the state sponsored breeding beneficiaries with a low income double working family with maybe one or two children. It would be pretty rude to suggest hard working but underpaid people just not breed because society has turned to shit.
As for 5% that pay 30% of the tax, well no shit if that 5% are paid proportionately higher than most people then their tax bill will be considerably higher. What a terrible problem to have. They could always ask to be paid less, or bugger off to Aus where the 180k+ bracket is higher at 45%.
Let's all join the ranks of the highly paid. Stop dishing out courses in nursing or early childhood teaching, everyone's going to be a CEO, CFO, consultant. I certainly don't feel milked for being a net tax contributor, the amount of income tax I pay never crosses my mind because I'm not a psychopathic asshole.
Your comment is pathetic.
Definitely no envy here, our family pays a lot of tax too. I've worked hard and seen success in my career, but I don't discount the fact that other people work just as hard and can't get ahead.
It just gets a little old when people complain about how the top x% of salary earners carry such a burden of income tax, like really cry me a river. What percentage of a top x% salary earners income is needed to survive? Next they'll be complaining about the fuel tax burden when driving their Bentley.
Since emigrating to NZ 25 years ago my wealth has increased 10 fold paid my taxes brought up 2 kids both sucessful not easy long hours and hard work but I don't regret it but I am really pissed off that so many NZers elected a bunch of abjectly incompetent clowns to govern NZ and set us on the road to a New Venezuela.
Jamie businesses can’t always just raise their prices. They may have to suck it up and lower their profits or even go out of business depending on things like whether they have competitors who are more efficient, or have lower input costs, or if the market is flooded with supply etc.
It’s strange. people accept that generally if you raise input costs, businesses will have to raise the cost of a product to compensate. It’s 101 economics.
101 economics also says demand will also drop. Practically that might mean choosing a less expensive rental - poorer condition, smaller size or less expensive location. Or squeezing more people into the same space.
You can reduce costs and the best place to start is the public sector , try a pilot excercise - all depts and councils must reduce costs by 5% and eliminate obstructionist regulations by 100% and turn NZ into a powerhouse as people are released from over regulation and allowed to re kindle the No 8 wire spirit.
Jamie - the direction of rents is likely to be down in places like Auckland, as the number of rental listings is way above usual levels.
Also, landlords didn’t reduce rentals when their costs went massively down (interest rates decreasing), and they are already receiving massive government subsidies in the form of the Accommodation Supplement.
Landlords are supplying the social housing that the government should have built themselves! That is the problem.
The audacity for the same government to then remove interest deductibility and tax those same landlords for providing that service is unbelievable. If they have such a problem with landlords, perhaps the government should just purchase said housing!
So... to be correct, the govt is in the position to take that without paying a dime, if/when necessary.
Just saying
Will it cause a revolution? not at all.
Will they do that? probably not.
But man, stating that landlords are "providing a service" is quite far fetched, to say the least.
What they do is to leverage on an artificial scarcity and abuse of a privileged position.
They are not worse than renters (because I believe most renters would do the same if it was possible), all people are just looking at self interest.
But no, not at all, the "service" offered by landlords is definitely not philanthropy.
To remove interest deductibility was one of the very few good things happened in the last years.
If you want go buy a new house instead of an old one , you still can... and you will still be able to deduct interests (which is still way generous treatment, in my opinion)
My comment related to Accommodation Supplement. If govt. had constructed enough social houses there would be limited need to pay this subsidy. But apparently the National Party didn't think it had any responsibilities in this area, selling off, rather than building social housing. Until they solve this under supply, they have no business taxing landlords who are filling the gap.
If much of this cohort goes belly up, tough luck. When you enter into a speculative investment, you know that things that can go up can as well go down, and this includes property. When somebody invest in shares, most such investors are ready to accept potential losses of up to 30% or more, and this is part of the investment game - if this is not the case for housing specuvestors, they have only themselves to blame - nobody pointed a gun at their head forcing to enter the housing Ponzi.
But if they all go under at once they might collapse the housing market. And maybe even the banks. It is a financial stability risk that affects everyone.
Management of stability risks is supposed to be the RBNZ's job.
Malamah did some calculations a few days ago. In 2008, the RBNZ said that 8% of households held 40% of the debt. If that figure holds true then Malamah calculated that this means that those 8% of households are sitting on an average $1,350,000 debt. Scary stuff.
And after that big borrowing surge post-covid when the LVRs were dropped it is posible that the debt is even more concentrated than it was in 2008.
Imagine 8% of households holding 1.35 million each in debt as rates are rapidly rising... hello Iceland-style bank meltdown, how ya doin'?
How good is RBNZ at managing financial stability risks? We are about to find out.
Inflation expectations are now social media driven... It is a new beast, everybody is feeling the cost of living increase and price rises are sent across the country and the world within minutes driven straight by consumers and wage earners.
Never in my life have I heard people talk about inflation, now it's in daily conversation, it is spoken about on social media hourly, especially from people who are not into finance at all. They are just every day people and there are billions of them and they are looking for somebody to stop the price increases and have got their eyes looking straight at the money printers and interest rates hoping and praying.
when i was young in UK we had crazy inflation (25% and oil price driven then) and everyone and the newspapers spoke about it a lot. In the 80s was 8%.
People either werent there, or forgot...... and assume it cant happen again because we are all smarter now.
hmmm...
Is the inflation/monetary phenomenon simply a consequence of usury? Combine it with the advertising/marketing propaganda telling everyone they're not enough, don't have enough, need to meet some ideal. Does economic growth serve the people or is it needed to grow the financial market, fund the debt and pay the usury? Are we in reality, being conditioned into enslavement now for the hope of future freedom?
https://aeon.co/essays/how-did-usury-stop-being-a-sin-and-become-respec…
The Reserve Bank raising interest rates to tame second order inflation expectations is their core job. It is what they are required to do.
Yet the Reserve Banks actions will have other consequences too. Much higher interest rates will discourage investment in businesses and in construction. Unemployment will rise. For young workers who are asset poor and often have high mortgages the effects will be heavily felt. Some of those young workers if they have in-demand skills may decide to take their productivity overseas. In summary raising interest rates will not help fix NZ's productivity problems.
Controlling inflation has long term benefits - no one wants to go back to stagflation conditions. But is there a better way of controlling inflation expectations without the other consequences? What if the Finance Minister and Reserve Bank Governor worked together liked they did at the outbreak of Covid when they dropped interest rates - which boosted asset prices.
What if those assets were taxed in the form of a urban land tax (LVT) in lieu of some interest rate rises? So instead of just targeting mortgage borrowers all land owners would directly feel the wealth effect. Land and house prices would probably drop further. There would be a reverse wealth effect which would quickly reduce inflationary expectations.
The revenue from LVT could be redirected into bottom bracket PAYE tax cuts, once the government deficit was back in surplus, say in 2025. This means in the short term the government would be removing stimulus from the economy and in the medium to long term the effect would be neutral - except land owners would pay more tax and workers less.
In the short term LVT will have less effect on building construction than the alternative of the Reserve Bank raising interest rates. LVT doesn't tax buildings. Landowners who build another residential, commercial or other building unit on their land do not pay more tax. So there is no disincentive to build. In fact, it may induce some construction activity as it shifts the dial from land banking to land development.
For renters LVT doesn't lead to higher rents because that would incentivise other landlords to build more residential units to compete against the rent rising landlords. This makes LVT a genuine wealth tax.
Hi Brendon, this is a thoughtful comment with some great suggestions.
Unfortunately the reason this can't happen is that the government would be voted out in 2023 as our political class, while secretly knowing this is good for the country, break it down to something simple and criticise the hell out of it.
It's just how we like to roll in NZ (and most western nations to be fair).
I did an Auckland-esque example using a $900,000 Auckland-sized mortgage as well, but I've decided the results were too frightening to detail here.
Setting aside any low equity charges (which may become more widespread as the property bubble deflates).
$900k ~ 30Y @ 2.35% = $3486 / month
$900k ~ 30Y @ 6.00% = $5396 / month
$1910/month or $441/week repayment rise in repayments. Approximately +54%.
$4153/month or $959/week of that is dead money handed to the bank in interest charges. The cost of renting the money.
The icing on the cake would be that for a $900k mortgage the hapless FHB will probably be purchasing something like this out in the arse end of Westgate.
https://universalhomes.co.nz/properties/lot-226-10-oma-hoiho-place/
This is what government and council have decided is the dream home of the future.
We truly live in the land of opportunity. Can't beat that kiwi lifestyle.
Throw in the population ponzi to keep prices up, the one hour+ commutes already becoming the norm on SH16 from 4pm onwards, the lack of rapid transit, the huge number of new homes, the glacial pace which anything gets done in Auckland and the social cesspit that is Westgate (the shopping pit), that's sadly quite likely. Is this really, really the quality of life we're expected to be grateful for, yet only attainable if we make extreme sacrifices?
The issue seems to be those with money and property in NZ wanta better environment to live in but are as yet not willing to sacrifice their wealth to get it.
So my take is that the people that vote are the home owners and landlords, who all want to continue to invst in property hence they want property not to drop in price and thus dont want a CGT (etc) stop the game. In turn the government and opposition do their voter surveys and work out that to win the majority of voters they need housing prices to rise... so their actions have policies that keep the 'ponzi' going.
If true either:
- other people (non property owners) need to vote in large numbers for alternate policies/party
or
- the current majority of voters need to shift their thinking
I wonder if we will follow australia where voters are voting to improve climate change policy regardless the export and economical cost... poss driven by effect of climate change on their own lives. for us it will likely be lack of action on climate change, exodus of key skills (teachers, healthcare workers..) and increasing crime - is driven by the impact of housing on wealth distribution...
How about:
if false:
the majority have voted for governments that have talked about the housing issue 3/5 of the last elections, but once elected, those governments reneged on their talk, and joined the gravy train themselves with the absurd salaries and perks they receive, all whilst using their ineptitude to further drive those who voted for them into the ground?
Yes this is a really interesting one, SH16 has been an incredibly obvious choice for rapid public transport, I mean there are huge developments still going at the end of it.
It would be expensive but the quality of life impact of a rail link would considerable and from an emissions perspective very good indeed.
I could be wrong, but I would have thought it's structured in the sense that they take out a 30 year mortgage, 5 years interest only and then the balance of 25 years is P & I. The transition to P & I is as seamless as coming off a fix term onto floating.
A restructure would happen if they're to apply for an extension to the interest only period, but there's generally a limit of 5 years.
A lot of landlords will have double that amount of debt.
Plenty will have 1.8 million in debt, spread over several houses.
Which would mean an $882/week repayment rise.
Easy-as mate. Just eat less avocado on toast and put rents up. 🙃 Or sell a rental... into a dying market with tightening credit.
We might just see the world's fastest property price crash.
That is the whole point.
Those kinds of cost increases cannot be absorbed by most landlords.
Especially landlords who still have big mortgages over their PPORs. Which are most of them.
There are some old-school landlords with lots of equity and small mortgages. They will be fine. But most landlords are not in that position. Right up until about 12 months ago we had Matt Gilligan of Gilligan Rowe Accountants (the "rock star" Accountants for property investors) on social media telling landlords to load up on debt while it was "cheap". When the LVRs were removed there was a surge of landlords who jumped into the market because they COULD, at lvrs higher than ever before. There was a big stupid feeding frenzy of debt. When debt was "cheap". Lots of landlords are in over their heads. I could post facts and figures on here all day, but if you don't already understand that, you probably never will.
Look at all the whingeing and moaning that happened when the interest deductibility rules changed. All the landlords who said they would "have to" increase rents. A big percentage of them have overpaid for their rentals and were already on the bones of their bums before rates started rising.
The interest deductibility rule changes are a teeny tiny little drop in the bucket compared to the interest rate changes. Almost insignificant.
From what I have seen ... on Facebook investor groups, from comments on this site, and from looking at the DTI figures and LVR figures and negative gearing figures and new lending figures, I would confidently say that most landlords don't have a hope of being able to handle the coming interest rate rises.
Most of them are paddling around naked and half of them are too dumb to even realize that the tide is going out.
I often recall a statement from about ten years ago, by a very senior RBNZ person, and stated to a small group under Chatham House rules, that the RBNZ had to be careful with the OCR not to get too far ahead of or behind the markets. If they did, then they would lose whatever modest influence they do have.
Since that time, swaps markets have become more sophisticated and swap rates are much more widely quoted, demonstrating to everyone that the OCR influence is largely limited to short term rates. However, central banks have also increasingly used QE to influence longer term rates.
We now need to have an increasing focus on the effects of the proposed quantitative tightening. My own perspective is that this issue, and how it is handled both in NZ and overseas, will be the key determinant of asset inflation going forward.
KeithW
Yes, QT if applied with some rigour will definitely reduce asset prices relative to what will happen if extensive QT does not occur.
The point is that at the moment there is so much money sloshing around looking for a home that, in the absence of very considerable QT, we may see ongoing asset inflation for some classes of assets.
Whereas I found it very easy to see inflation on the horizon way back a full two years ago, the path forward from here is more tricky with some considerable prospect of simultaneous inflation and recession. That would be a real nasty combination, with Hobson's choice as to policy alternatives.
KeithW
For who? I struggled to find a fencing contractor and when one was identified he provided a ridiculous quote. I’m holding fire for another 12-months. Hopefully there will be a bit more competition.
The 2002 Honda Jazz needs replacing. I’m picking a number of leveraged individuals might be quitting near news cars at prices lower than today.
Always an upside Yvil.
RBNZ figures for March 2021 peak sales month. Auckland first home buyers with DTI >7. total 87 mil loaned to 101 borrowers @ average 861k each. Best case average income 123k to support
If the 50% fixed 12 months only holds true then 50 of them have already gone from 2.25 % fixed to 3.5% fixed assuming they took the March 2022 1 year special. They are dealing with $165 per week average additional interest cost. Come March 2023 it will be at least another $165 again. Those who purchased after them at even higher prices are refixing on even higher rates. The snowball effect will turn into an avalanche.
"What's happened is that the importance of the actual, here and now, physical OCR has diminished considerably in favour of a spectral 'Future OCR'; that is, what the OCR might/could be - in the months and years ahead."
Even when buying any asset be it stock or house for investment or speculation, empasis is on future price. If one feel that price will go up, will pay a premium to buy like last two years when people were paying say 1.2 Million for a million dollar as was expecting to go up again to 1.4 million (And it also happened when price was rising monthly, if not weekly and government/rbnz were silent with manipulative theory Transitory Inflation) and now when future expectation is that house price will fall, for 1.1 Million house buyers will want to pay a million or $900000 as expect it to fall further in trying to protect themselves.
So is nothing new as markets moves more in expectation than the actual event. So chill ....
Ha all those years trying to pump consumer inflation in a deflationary environment (cheap Chinese manufacturing) and they couldn't understand why inflation wasn't showing up. Domestic inflation always on the up but it can be hidden with BS weightings and hedonistic slight of hand.
WFF was pumped into housing, every Tom, Dick and Harry, Jane and Joe Bloggs encouraged to speculate on residential property investment and the leftovers pumped into the tech boom and/or crypto. All only to serve the financial market which must be protected at all costs. And the pointy heads in their ivory towers playing overlords want to bemoan the lack of productivity because they're too blind to see that the financial market is the least productive of all industries.
This is the consequence of "capitalism" and economic theory. Turn everything possible into capital and if it can't be it's worthless. Everyone hungry to be millionaires and then what? Millionaires, billionaires and still hungry!
Y'all want to believe it's the human condition because admitting we've been brainwashed and programmed is too much to acknowledge. Who's gonna be accountable for solving that?
The economy's gonna come grinding to a halt? But the "free" market solves everything how can this be. Ooh a recession will clean it all out. And then what, rinse and repeat. Sounds very rational. Doing the same thing over and over and expecting a different result....
It's as if we have no idea and no vision of the result we're trying to create. Doesn't sound very intelligent at all.
Something to ponder over the long weekend while we celebrate the ultimate head of the ruling class, the elite of the elite. Mwaahhh.
Show me the evidence why you don't agree and the "value" of crypto isn't just an extension of hyping "asset" prices. People are "investing" for the monetary gains same as all other investment and it loses value just the same. It's driven by the same scarcity and fear (greed) mindset that underlies all other speculation, only on steroids. It's a technology that could be useful, only nobody's figured out what for yet because they're only focused on the riches. It's no different from a bank printing debt out of nothing and calling it "money" and still has to be funded by fiat currency. It might be great for the individual who times it right but how is that any different from the rest of the casino?
Email received from one of prominent finance expert / company
We're watching one of the biggest market bubbles in history burst in front of our eyes.
The warnings have been mounting for years.
Yes, this is just like what happened in 2008... 2000... and 1929.
Except the bubble this time is much, much bigger.
And investors could be in for a decade or more of negative returns from here.
Already, the markets have been ugly this year.
But things could soon get much worse.
It's these kinds of articles that will mean I'll probably always have a contributing subscription to interest.co.nz
Not because I think you're 100% right. (I reckon you're about 90% on the nose, aside from the fact that you don't think it's mainly a raised eyebrow bluff.)
But you're talking about the right things and stimulating others to think about them, too.
The market is what people think the market is. It is not a thing in itself.
It took me ages to figure out how the money thing works. Decades in fact. In the end (for me) it boiled down to a combination of debt & confidence. Or the lack thereof. I rate hard work as well, but to really get on in this life, it came down to debt & confidence. So, here we are once again. I already know the debt thing is beyond fully paying back. PDK has told me so umpteen times, already. So, how much confidence do we possess? Well, I think we might be about to find out.
Who's got the balls for the next book in the series?
Your choice is to try and squirrel away enough nuts for winter, or make a gamble and bet on your medium to long term earning potential.
It is complicated because an individual's earning career is usually finite, whereas in theory the market and capacity for debt is infinite.
Looking around, the best move I can see is relocating somewhere with a drastically lower cost of living.
^
When the GFC hit, I lost my job, and spent 4 years unable to find another due to hundreds of people applying for the same positions - I got turned down for jobs I'd already done because I didn't have a piece of paper saying I could learn to do it, despite almost a decade's experience. And then as the market settled, the next generation came through, and there was the perception they were cheaper to hire, and they didn't have x years of unemployment on their CV.
So I didn't sit idle - I realised pretty early on what was going on - so I spent the time up-skilling my future self. Several years, in fact, and it was hard financially, coming out the other side, totally worth it.
This time around, I'm a bit nervous about the future (I can see all the same signs I missed before 2008), but I'm now working in an industry that should be able to weather the coming storm fairly well. My current self is thanking my past self for taking the risk - though it cost me several years of my working life - and the future years should be better than the former (even if it all turns to custard in the short term).
Having said all that - if TOP don't get at least some representation in next year, we're planning on leaving NZ for the UK. We would have left already if my wife hadn't committed to completing her professional registration here.
Wrong assumption
You pay "services" and goods in different ways:
sometimes you pay extra $$$
sometimes you pay by being less confortable
sometimes you pay by adapting to a lower standard
If rents go over your budget, you will "pay" by looking for worse/different alternatives.
As more rents go up as less those things are obstacles.
Rents can't just go up over what people can pay, or those people will choose to leave/move.
Viable alternatives? there are so many...
Move city
Live in a boat
Live as homeless
Live in a flat
Live on a caravan
Live with your parents
Squat
Live as home-sitter
etc... (the list of alternatives is long)
There are cons in all of them
There are cons in paying a rent you can't afford
pick your evil
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