Ready, aim, fire!
Much was made at the outset of this rising interest rate cycle about how much 'bang for its buck' the Reserve Bank (RBNZ) could achieve as it started to crank up the Official Cash Rate (OCR) from the emergency pandemic setting of 0.25%.
The general consensus last year was that the RBNZ had plenty of firepower at its disposal because of the fact that relatively few people had fixed their mortgages for long terms. Hence the theory that any rises in interest rates would quickly affect mortgage holders because these holders would relatively soon face the higher rates.
This consensus was indeed very much true. Bang. For. Buck. And much more on that shortly.
First though, it's worth just breaking down the hiking cycle that began last year into two parts.
The RBNZ didn't actually begin raising the OCR till October of last year. It's easy to actually forget that.
However, it did much to kick off rising interest rates when its May Monetary Policy showed a 'forward track' projection for OCR levels in the future much higher than the financial markets had expected.
It was the financial markets that picked up the interest rate cue and ran with it - sending wholesale interest rates much higher. And then the banks reacted to these rising rates (a key part of their funding) by starting to move mortgage rates up.
So, while the RBNZ 'officially' started the hiking cycle with that first OCR move in October (a mere 25-point rise, pah! Nothing!), the action in the marketplace was already well under way.
Mortgage rates hit the rock bottom of the 'down' cycle in June of 2021. According to the RBNZ's monthly averages of fixed 'specials' from the banks, the one year rate was just 2.2% in June a year ago. By September, however, the one-year rates had already risen to over 2.7%. Remember this before the RBNZ had moved the OCR.
So, to go back to June 2021 then, and a market that was starting to now prep itself for higher rates, how was the general populace placed for the rigours of a nice mortgage rate hike?
Well, the general populace, accustomed to ever-falling rates had been going ever shorter with its mortgage rate fixing. That's what happens when you keep expecting rates to fall. Why go long?!
A crunch of the RBNZ statistics shows that between them owner-occupiers and investors had just over $275 billion of fixed rate mortgages as at June 2021. (For the record, the amount of mortgages on floating rates has stayed remarkably stable in and around $50 billion over the past year).
So, $275 billion of fixed rate mortgages - of which just under 75% was due to be refixed in a year or less time. In other words, any upward moves in interest rates would 'get at' 75% of the fixed mortgage money out there in 12 months time or less. That's bang for your buck with a capital B.
I was interested to see how people have reacted with refixing and putting their financial, er, houses, in order. And boy have they reacted.
If we take it by the quarter, the amount of mortgage money up for refixing in 12 months or less was just under 75% in June 2021, under 68% by September 2021, about 58% by December 2021, 55% by March of this year and by June, the latest available month, 50.5%.
That's an amazing drop in a year. And it will have continued.
Yes, it's safe to assume that already the amount of mortgage money due to refix in 12 months or less is now under less than half. That's still a fair bit, but it's a lot less than it was.
To quantify this a little bit, as of June 2021 there was just $68 billion of outstanding owner-occupier and investor mortgage money that was at a rate fixed for longer than a year.
As of June 2022 the directly comparable figure stood at just under $146 billion. That's $146 billion worth of mortgages that won't now be affected by whatever the RBNZ does in the next year. Of course though, much of that money will be at higher rates than it was.
(It's worth adding here that the total amount of fixed rate mortgages held by owner-occupiers and investors increased by less than $20 billion between June 21 and June 22 to a total of nearly $295 billion, with overall new mortgage growth having slowed so much recently as the housing market has dipped. So, we can see that most of the change in duration of fixing is due to existing holders who have re-fixed.)
In terms of what people have been refixing from and fixing to that obviously depends what duration of term they were on and when they refixed.
As I opined a couple of months ago, June of this year effectively represented 'peak mortgage shock time' since it was 12 months on from the bottom of the interest rate cycle.
What this means (using RBNZ averages again) is that someone on a one-year rate as of June 2021 might have refixed (for the same term) at 5.1%, while someone else might have gone from a two-year rate at 2.7% to a new (two-year) rate of 5.5%.
That opine from a couple of months ago highlighted a blood curdling example of the kind of extra costs that households might face.
We are still very much in the wait-and-see period at the moment but, do you know what? I think the RBNZ at this stage might be disappointed that there are not bigger signs of a slow down in consumer spending.
It is slowing, but not at this stage precipitously.
Why might this be the case?
Well, obviously not everybody is getting hit equally at all with interest rate rises. The people most vulnerable are, for example, those that took out Auckland-esque $900,000 mortgages at an interest rate of 2.2% and are now paying 5.1%. Ouch.
Those people are out there, but they are at the extreme end of the range.
There's other folk, plenty of them, with good equity in their homes, not massive mortgages, and who were able to enjoy the super low rates by paying extra on their houses or stashing money.
And yes, stashing money. The official stats show us that from the start of the pandemic we have been able to squirrel away a fair bit of that stimulus cash that's bee floating around. We've been saving.
So, it could be that despite the apparent 'bang for its bucks' the RBNZ has had, there are large parts of the population that have been to this point relatively unaffected.
However, nobody can be sure (because people won't say) the extent to which maybe the higher mortgage payments are gradually chipping away at savings, or removing the head-start some had on their monthly repayments. We don't know. But it's possible. A kind of delayed bang for the buck.
Statistics New Zealand's household net worth data for the March quarter showed that having come off an extremely strong position of savings during the peak pandemic period, Kiwis had spent nearly every dollar they earned during that quarter. It has to be imagined these figures will have worsened in the June quarter. We are no longer saving.
Remember too, the borders are open now. We are now free to leap off overseas and (over)spend on the cards again. And the credit data shows that IS happening.
It could all be a delayed effect then. The slowdown may suddenly hit in earnest.
But as I say right now the RBNZ may not be entirely satisfied its efforts are taking enough steam out of the too-hot economy.
And yet as the figures above demonstrate were are already now well through 'peak mortgage shock' time.
Further OCR rises from here will have decreasing 'shock' power.
Potentially, what that does mean is the RBNZ may feel compelled to keep interest rates higher for longer to effectively grind the economy slower over a period of time - and to allow things to happen such as the depleting of savings etc, so, that people do spend less. This picture could change if inflation imported from overseas dies away - but there's still massive uncertainties about that.
There's plenty to keep our eyes on here. I'm very interested in whether and what signs of stress we may see from some of the people who climbed in right at the top of the housing market (and bottom of the interest rate cycle). I'm also interested in what happens to our spending patterns over the next two or three months. And what of our savings? Are we now set to start raiding our piggy banks again, having saved so well over the past couple of years?
As I keep saying - whatever happens, it ain't going to be dull.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
95 Comments
I suspect it’ll be a bit of a vicious cycle until hot money inflation and Ukraine unwinds.
Any of those with some savings stashed but who have a big mortgage at 5% are going to deplete them as the cash goes into payments and higher costs of living, rather than aggregate demand which will probably remain sluggish for the foreseeable (especially while people remain edgy regarding their outflows).
I expect wage rises have played out this FY (except for horrid mercenary consultants like me) so limited relief there for the average Joe / Jane.
Yes, indeed. The article avoids mentioning the wider world, which is what actually sets the fixed rates. So far the RBNZ have been able to slow the currency fall by raising rates, but the process may have only just begun.
1 The US is still raising rates, this is pushing the USD up, causing a panic worldwide as USD borrowers try to refinance their loans. That is why the list of bankrupt, destitute and starving nations grows daily. There is also the suspicion in the air that it may not be just about inflation, but also about causing financial stress and civil disorder in Russia and China.
2 The inflation of consumable stuff like petrol and food that we are having is mainly caused by stupidity other than the monetary sort, by actual shortages of real stuff.
3 The inflation in house prices, however, does seem to be because of monetary stupidity over the last 30 years. The RBNZ are partly the scapegoat of the Establishment (political and bureaucratic) Groupthink and their "independence" is conditional on them drinking of that Koolaid fountain of false assumptions.
4 Theories usually fail because there are false and/or unidentified assumptions.
5 Why do we assume that buggering about with the price of interest rates will lead to good outcomes? We generally assume that market price signals convey real, if noisy, data to market producers to produce more or less of something. Same for consumers. It beggars believe that we fall for this double-think.
6 The RBNZ seem like a decent, hard working bunch with our best interests at heart. When will they realise they have been outwitted and stop being Useful Idiots?
A couple of somewhat relevant links:
https://asiatimes.com/2022/08/chinas-liquidity-trap-growing-deep-and-wi…
https://www.myrmikan.com/pub/Myrmikan_Research_2022_08_11.pdf
The article complains that consumer spending is not slowing. You are stating correctly that inflation has not played out.
The thing is, tons of money has been printed recently. Inevitably, this is driving up consumer prices. More money flowing around meets the same amount of goods, or even reduced amounts of goods due to supply shortages. Result: rising prices.
This crisis cannot be properly addressed by interest rate hikes. It is not like people are spending money like crazy, in fact the consumer sentiment has shifted to prepare for recession. It is simple - too much money flowing around, but that sits with the (now wealthy) vendors of properties and with those that have received 'Covid Support', it does not sit with the average consumer.
More interest rate hikes will hurt the borrowers and the average consumer, because the housing market is already in decline and we are about to face a financial crisis which may lead to mass insolvencies and people getting laid off. Someone posted a video about Ireland 2007-2014 recently, which may serve as a frightful example. I hope the Reserve Bank will finally come to their senses and stop rate hikes.
Close to 100% of the property investors I talk to in person are saying that for the benefit of renters we should keep the OCR very low so that they don't lose their jobs. Should I have been surprised? I don't know...
It is code for 'we must keep the OCR low so that the value of my property portfolio doesn't go down'.
Markus could be an exception....
Yes exactly....when guys like Powell say the economy is strong but the funds rate is at 0% then you realise you are being lied to.
The economy is very fragile and weak....that is why interest rates have to be as such historically low levels.
And now they having to raise rates into a weak economy. They are being forced to call their own bluff....crazy stuff really.
ShoreThing, from what I understand it takes about 9 months for interest rate hikes to take full effect. This is because mortgages roll over into maturity one by one, not all at once.
The RBNZ needs to slow down with further rate hikes, otherwise we may be facing a system crash. By the way, all of you on this forum who think you can benefit from a crash: Consider the RBNZ may then make another oversteer move and start printing money like crazy (QE, combined with ultra-low OCR). This could lead to hyperinflation, non-property owners would not benefit from this, and certainly not the average saver or wage earner.
bang on. The economy wont crash if the OCR and interest rates rise a way further, businesses and households with good fundamentals (most of them) will actually prosper in th \e long ter, lessons will be learned by the next generation. And more importantly our economy will move toward investment in productive businesses, climate change will slow (as less is spent), crime rates will fall (as accomodation and living costs fall) and houses will be affordable for young professionals we need for a high quality of life.
To be honest i dont get what anyone who is careful with money is worrying about. Rate rises will only hurt those who are over leveraged or businesses that are badly run - in the short term. Which is actually a good thing to clear out those in precarious positions before they get to big to fail
That's a pretty ignorant comment ST, try putting up the cash rate by 2.5% in Japan or the Euro Zone and get back to me
In the case of Japan, I wonder what damage raising the interest rate to 2.5%. Private debt in Japan is relatively low and the public debt is largely owed to themselves. By the way, when I last looked, h'hold debt to GDP in Japan has stayed stable under 70% since its bubble burst. Over the same time period, NZ's ratio has increased 400% and is sitting just under 100% of GDP.
exactly!
Sub 3% OCR should be considered as a welfare subsidy for home buyers.
Those who are worried about a normalised OCR crashing the economy would have us on life support for ever.
The bigger risk to the economy is inflation running at double the OCR.
Our govt & RB were dumb and printed like crazy and dished out free money, thinking there was going to be no consequences. The result was an extra 35% increase in the housing bubble and rampant inflation. Now that bubble is being unwound, yep there will be some pain but you cant drink straight rum like a drunken sailor all night and expect to wake up fresh as a daisy.
theglc, what a load of nonsense! How is an OCR below 3% a subsidy for home buyers? Do you realise how hard it is to borrow at the current rates and that the property market is actually falling?
The reality is, there is no such thing as a fixed neutral OCR. 3% could have been neutral five or ten years ago, but at the current level of indebtedness it is deflationary (for housing), certainly not a "subsidy".
Inflation (a la 1970ies) is not the bigger risk compared to a deflationary collapse a la 1929 to 1932. This was known as the Great Depression and lead to a world war.
IO, the hyperinflation in Germany occurred around 1923. This was followed by the "Golden Twenties" (a period of prosperity), then Wall Street crashed in 1929, then came the Great Depression 1929-1932, then election of Hitler in January 1933. So, in my opinion, deflation was the main cause, alongside other factors (treaty of Versaille, perceived threat of Communism via Ernst Thaelmann, etc.) Certainly though, the inflation of 1923 had some effect too, it wiped out the lower middle class (who lost their savings), whilst the Great Depression later wiped out everyone economically.
Those who don't own assets/property have been living in a depression 2008 - now....so many have already been wiped out. If you watch the news, you will already see the rising social instability (crime, poverty, political divisions etc).
(and yes aware of the dates of the inflation in Germany).
What is your plan to avoid a depression here when one part of society is already suffering/suffered a lot - print more money? Also note that the inequality stats are very similar now to what they were in the late 1920's...ie. the rich have got very rich and the not rich...well they've been ignored...
Interestingly, the depression and subsequent war was a good way to rectify the inequality problem. But its only those who have a lot to lose who don't want the status quo to change (i.e. they are becoming very fearful now).
I guess then there's no need for accommodation supplements and foodbanks!
Everything is great because there is no unemployment - but oddly at the same time, people are employed but they can't afford to pay rent and put food on the table without assistance!
Have you talked to people at foodbanks lately? Demand has been increasing higher and higher over the past decade to now record demand. I.e. people are really struggling out there at the bottom end. Those people, can't afford to live in this country because the economy isn't supporting them...they are living through a depression. So as I say, its been a depression for non-asset/property owner types.
You might find you are living in a fools paradise refactornz (are you a property investor type who has got fabulously wealthy the last 10 years, while others suffered at the bottom?)
The landlord types think its great of course whats been going on....but appear to miss the suffering that is going on in other parts of society.
So you are trying to imply that everyone who doesn't own property is instead using accommodation supplements and foodbanks?
oddly at the same time, people are employed but they can't afford to pay rent and put food on the table without assistance!
That's simply not true. You're talking about a subset of the non-property-owning population.
are you a property investor type who has got fabulously wealthy the last 10 years, while others suffered at the bottom?
No, I was a first home buyer 5 years ago and don't own any investment property. I was mostly renting while raising a family.
Your posts are very biased. Hardly an independent observer.
I'm making the point that people who don't own assets have and are living through depression like conditions. If things were going so well, there is no requirement for so many people to receive accommodation supplements, nor would record quantities of people be lining up at the food banks.
If you don't like my views, that's fine. Oddly I've found its only people with a vested interest who find my posts biased.
And generally they are people who are terrified that house prices might come down to more historically accepted norms (based upon fundamentals like debt to income ratios).
But given you purchased 5 years ago and don't own multiple properties, I'm sure you'll do just fine.
ps note that anytime that unemployment has been at the record lows we have just witnessed, it has been just before a massive crash/recession.
I'm making the point that people who don't own assets have and are living through depression like conditions.
That's the bit I object to. The bulk of people without assets are in no-where near depression like conditions. I think you vastly understate how bad things would be in an actual depression. Who knows? We may yet find out in a year or two.
IO, I reckon a soft landing should have been engineered. First of all, it was mad to lower interest rates to 0.25%. Now, to smash the entire economy, equally mad. Slower and softer raises, to carefully avoid an Ireland 2007-2014 scenario would be good. We are possibly beyond that now.
ShoreThing, an OCR of 2.5% represents a tenfold rate hike. Consider property buyers who bought property at an OCR of 0.25%. This was at the peak of the property market, when the Reserve Bank and/or government had also reduced loan to value restrictions, so people were able to borrow 90%. You may say our economy was "already toast", I would say the actions of the Reserve Bank and government (money printing at the time) were irresponsible (too low an OCR, combined with removed lending restrictions, a fatal mix).
Consider a property purchase for $1.0m with a $0.1m deposit and $0.9m mortgage. If the value of the property is now $0.8m, then the borrower is effectively bankrupt. Any further price declines are on the banks, so we may soon be facing a financial crisis. This is already beginning, take note of foreclosures. It has happened before, take note of Ireland 2007-2014, there was a video on this forum recently.
I completely agree with you Markus, New Zealanders have been poorly served by the RBNZ and government for a long time. I just don't think we should go back to the bad behaviour that inflamed these issues in order to salve the pain they are causing - doing so would just make those same issues much worse.
Yes, ShoreThing, I agree with you on this point. As a solution, very careful steps by the RBNZ should now be on the cards - perhaps they could leave the OCR unchanged today (although I doubt they will do that). Our economy has now become fragile like a house of cards through over-indebtedness, and careful direction by the RBNZ is needed to avoid a financial collapse whilst also trying to keep inflation as mild as possible (difficult after all the money printing).
Perhaps we could have left the OCR unchanged back in 2020 instead of pumping up the housing market by another 40% in the subsequent 12-18months?
All that did was further increase the possibility of future pain, by avoiding it at the time.
We've kicked the can down the road from 2008 to now - 14 years....not bad really. Can we kick it any further do you think?
Yes but I agree with Markus that two wrongs don't make a right. We shouldn't overreact now by raising the OCR too fast and risk causing more long term damage to the NZ economy. House prices are already falling and will continue to do so without raising the OCR further.
Consider a property purchase for $1.0m with a $0.1m deposit and $0.9m mortgage. If the value of the property is now $0.8m, then the borrower is effectively bankrupt. Any further price declines are on the banks, so we may soon be facing a financial crisis.
You are describing a personal crisis. That will be experienced by a very small section of society. The majority have no mortgage debt, or small/manageable debt.
You are not describing a "financial crisis" that will impact on most people in society. Chaosinflesh sets out the numbers in a comment below. The RBNZ has told us many times that they have stress tested the banks and that the financial system is resilient.
In the last few years we had 40%+ house price increases, but very few people were squealing about hyperinflation. In the next few years we could see 40%+ house price declines, but that would not necessarily result in any real deflation. We will be lucky if global inflation gets under control within the next 2 years, IMHO.
BS. Current rates are extremely stimulatory under the current circumstances. A neutral level of the OCR would be at least 4%. The only thing a reasonable OCR level will do is maybe crush some over-exposed parasitic housing specufestors, for which they can cry me a river; unfortunately, I admit, it will also hurt some gullible recent FHB's who believed in the self-serving propaganda that housing is always a one-way bet, impervious to the laws of economy and to economic fundamentals.
I reckon the majority of Kiwis agree with you. Most people want a high quality of life more than just more money. affordable houses for the next generation, less unskilled immigration, better healthcare, better education....
Those who chased money with excess risk, and damaged our economy and standard of life - can only blame themselves
Or maybe the FHB just wanted a roof over their head and with a change in situation, like moving for a new job, purchased rather than going through the nightmare of finding a house to rent (2x references, financial history, no pets, etc etc). Don't think gullible is a fair comment.
When 1/3 of households (covering half the population) are renters, and 2/3 of mortgages cost less than 1/2 the average rent AND are 10-months paid ahead...
That puts 7/9 of the population not really affected by interest rate rises at all. Not taking into account all those who have no mortgage or whose mortgages sit within the 50-100% of rent equation and are maybe not paid so far ahead..
There's far less people affected by the interest rate rises than the fear-mongers suggest.
Whilst those over-leveraged are screaming bloody murder, the rest of us are just going to keep getting on with life.
My wife and I are trying to do our bit for the economy - aside from saving for future adverse events, we're spending at local businesses, restaurants, etc. The sooner people realise holding onto wealth in the form of asset bubbles is bad for the economy as a whole, the better off we'll all be.
I like to think of money as the economy's engine oil, and mortgages etc. as big gluggy lumps that reduce the engines performance.
Correct many people are not *directly* affected by interest rate rises.
I have always said that the biggest effects of the interest rate rises will be indirect ones, and they will lag.
Just wait for the shit to really hit the fan in the residential construction sector. Many jobs will be lost and /or company and personal income slashed. That’s when the pain will really start to hit, in early 2023.
And remember that sector is much wider than builders, tradies and RE agents. Many professions strongly rely on the strength of that sector.
Sluggy, consumer sentiment is already shifting to negative. There was an article on this point on this very website.
That said, it is funny how people are often behind in adapting (I mean consumers, and employees, feeling very safe right now, a view that is not justified in my opinion). Once recession kicks in big time, you might see a sudden collapse of your revenue (which God may forbid), and once again people will be behind in picking up any uptrend later. In other words, a gloomy spirit might remain much longer than it should. In one word, consumers' perception has a time lag.
We here, on a finance forum, should be looking ahead. Right now, I fear the worst for New Zealand.
RBNZ need to go 100bps and shock the economy, otherwise everyone will continue to coast like frogs in boiling water.
This is not an economy, it's a casino. Unfortunately we are going to have to take our medicine for the greater good and pay the piper.
This idea that we can just live on borrowed money forever based on housing welfare has to end.
It will be painful, but it's the path to greater prosperity and a real economy.
Hopefully after this, people will learn not to act like lemmings and force the RBNZ to change their ways or completely lose public trust.
I like property, but if you're going to do well from it, you'd better be adding some real value along the way.
Otherwise, zero sympathy other than the duped FHB.
An idea. The banks added fuel to the inflationary fire through cheap money and will likely gain with interest rates going up. Their profits go overseas with no economic gain to NZ. Yet businesses and house owners in NZ face losses going forward. With building companies failing a whole chain of losses occur to sub contractors and tradies.
Would it be possible to set up a clearing house funded by banks where the instead banks took the risk of failure ? Businesses would still fail but it wouldn’t cascade down to debtors. This wouldn’t make much of a dent in the banks profits but would definitely help small businesses.
At the moment banks are cleaning up to no advantage to NZ whatsoever
Many NZers hold shares in Australian banks via Kiwisaver so although the profits flow outward, there is some recovery for Kiwis. Unsure how we would be better off if banks were 'NZ owned?' Note, for no real reason I am a fan of a NZ bank and admired Jim Anderton's push for Kiwibank.
The banks are allowed to extract eye watering billions from the NZ economy, and the taxpayer is always on the hook if they cock up and need rescue. It is insane that this is allowed. We should nationalise one of them and have the state guarantee it. Then the others can actually compete if they want business, and appropriately price in risk knowing they will not be rescued if it goes tits up.
People complain when Transmission Gully has a $300m cost blow out, or when minimum wage goes up at a cost of $400m people say it's a "kick in the guts" to businesses.
But when the foreign banks collectively profit more than our National Land Transport Programme? Well people certainly make a lot of noise about the state of our roads, and people certainly make a lot of noise about Government debt.
The worst part is that they don’t provide the advantages private banking is supposed to provide - the efficient allocation of capital.
Instead we have banks like ANZ with 70% of their loan book in residential mortgages. They aren’t taking capital and allocating it the businesses that will use it most effectively, they instead just used it to pump up a housing bubble
Nzdan, when banks are lending, they put very little of their own capital in. They create money out of thin air when lending, by borrowing it from the RBNZ which creates the money ex nihilo.
Eventually, this leads to a very unstable and overindebted economy. In such a state, the economy is like an unstable house of cards, it cannot handle steep interest rate hikes or else everything may collapse. We are at that stage.
Perhaps we shouldn't have allocated so much money to the housing market relative to those buyers incomes? Then we wouldn't have problems raising interest rates as required to limit aggregate demand...
Just a thought....
But then again if you want to encourage debt speculation during potentially one of the biggest housing bubbles the world has ever seen, then one should be ready to experience a large amount of pain when tide turns. One can't have it both ways.
Absolutely - that is why I was blown away when the RBNZ removed LVR's and encouraged banks to 'lend, lend, lend' to anyone and everyone back in 2020.
That is quite possibly one of the biggest blunders in central banking I have ever seen (and possibly will ever see).
All it did was overstimulate the market, see house prices rise 30% in a year, and now possibly result in many negative equity home owners (perhaps even debt defaults) if things get as bad as what many are suggesting in the coming 12-24months.
Yes, I agree, one of the biggest blunders of reserve banking ever seen. The National Party is rightfully calling for an investigation.
Hopefully, the RBNZ are not about to make another record blunder, by popping our financial system with a hot needle, sticking it into our debt balloon. Somehow, they should try to engineer a soft landing. But I am doubtful these days.
I don't really understand how people believe central banks will engineer a soft landing when they have had no control of price stability of things like housing on the way up.
House prices went up 30% in 12 months or about 40% in 18months after COVID arrived.....
And the central banks didn't give a damn.
I can see them having the same attitude on the way down...
"look house prices aren't our mandate, but keeping the CPI in the 1-3% band is..."
That's the thing. If they've maintained it's not their mandate on the way up (good times for many), why would they stick their hand in it on the way down?
Don't voluntarily get involved in things that have the potential to blow up in your face. People don't care if you tried and failed miserably.
The commercial banks only borrow from the central bank if their exchange settlement accounts run short of reserves and they don't lend these out anyway.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
I disagree - its just been poor regulation and oversight from the RBNZ (and government). We could have easily change the risk weightings used in the lending standards....but when we decide to allow the likes of property investors to buy even more property using the equity created in a rising property market...the market starts to have the characteristics of a ponzi scheme that risks collapsing if prices ever start falling.
So we could have introduced regulation to avoid this....but we didn't because it would have been politically undesirable...
Ultimately we reap what we sow..
Don't play dumb. You know the interest paid is real money, extracted from their client's toil. And the banks profit is derived from that interest paid.
The banks are making billions in profits, which are mostly sent off-shore. Some comes back in the form of local shareholders, true, but most remains offshore.
Therefore, they are extracting billions of dollars from the NZ economy.
This is going to turn in a war of attrition. The sharp peak and "job done" expectation is going to be slowly eroded and an understanding that the OCR will stay in this orbit for the medium term while events overseas play out will replace it. I used to think the OCR would reduce Q2 2023 and indeed we may see 25 bps come back but then I think we are going to see a new normal. If this should occur, tightening belts and other temporising strategies will be replaced by resetting of our home economics for a much longer haul.
It's this more long term spending correction that the RBNZ will want to see I suspect.
I agree, it’s difficult to see the full effect of the current hikes and I believe this will play out for a couple of years minimum before settling. If you consider what’s happening in the US and the outlook there over 2023-24, they were later to the party than we were but we will follow where they go.
The main effect of rate hikes is on lending/borrowing, not on consumer prices. In our country (unlike in the U.S. or Europe), most lending/borrowing relates to property.
Lowering the official cash rate to 0.25% has caused an economic frenzy in the property market. It did not cause consumer price inflation to rise, initially.
Now, steeply raising the official cash rate tenfold to 2.5% has caused a property market freeze, it may soon cause a full-blown financial crisis which may ruin pretty much the entire nation. It may not get consumer price inflation under control, I am afraid.
Last time housing was the object of such rampant gambling was the 70s. This underpinned and fueled the wage an price spiral, all just like today. The tipping point was interest rates had to get close to 20% to bring the speculative gambling to a halt. Anyone fried by this correction, crash, reset, soft landing, whatever, will have done it to themselves.
We need the reset. Just get on with it.
Yes exactly - it appears to be to me that its those who have too much to lose are the ones complaining that central banks are going to cause harm to the economy by raising interest rates.
What they can't see is the harm that has been done to other parts of the economy the last 10 years through excessively loose monetary policy settings.
The central banks are only bad now because it might cause the price of my housing portfolio to go down.....and yet complete silence the last 10 years while people were being priced out of the housing market or taking on massive mortgages just to buy their first home (and may now be in negative equity).
What do you mean by "long term spending correction that the RBNZ will want to see"? The RBNZ cannot affect long term consumer spending, most people simply need petrol and groceries to survive.
What the RBNZ are affecting with their official cash rate is the lending/borrowing activity and thus the wider economy. I wish they would go about this a bit more sensibly, instead of heavily oversteering each time (whilst lowering rates, and now whilst hiking rates).
Markus the long term correction is around discretionary spending. As the wealth effects becomes eroded, I'm guessing we'll see less new vehicles, jet skis, boats and so forth. I live in the Waikato and Karapiro got really busy with new utes towing shiny boats last Summer. 100% agree on non-discretionary items. My social concern is that this process will put many who could never aspire to owning their own home let alone a new car into the poverty bracket in the process.
Whilst I have much respect for David Hargreaves, it puzzles me how his article is saying we have not taken out enough steam of the too-hot economy. We are already seeing foreclosures (this usually marks the beginning of a finance crash)!
Also, consumer sentiment has shifted to negative. Nobody I know is "set to start raiding their piggy banks again".
Instead, we are facing a dire financial outlook. The RBNZ would do well to keep the OCR steady for some time and review the (delayed) effects of the rate hikes they have done.
Having said that, I have lost my trust in the RBNZ entirely. There was not much trust to begin with, but now it is entirely gone. I fear our economy may fall off a cliff, and I think the effects of this are widely underestimated by this discussion group here who think they can benefit from falling property prices. Yes, most people can benefit from falling property prices (up to now). But when a credit crunch comes and the banks stop lending, we may be in free fall. This would definitely spill over into the wider economy in terms of economic collapse and mass unemployment, hardly anybody would be away laughing.
Best to avoid creating these circumstances in the first place Markus.....but if you raised the red flags years ago you got dismissed and belittled as being a "Doom Gloom Merchant". They tried to silence those who warned about the impending mess that the current financial conditions were creating - why? Because they were creating wealth for themselves, and yet it was quite possibly going to be at the expense of the many (i.e. what we might be facing now).
Hopefully you can see that it is not what the central banks are doing now that will cause the damage....its what they have done the last 10 years that has caused the damage.....excessively loose monetary policy for a very long period of time is a very dangerous thing to do, especially when house prices are going up 10, 15, 30% p.a.
That was the stupidity. Regulating interest rates back toward historical averages is not stupidity - it is normality returning. And when you have normality, house prices aren't 10x household incomes.
Agree, it was bloody stupid (hard to know how everyone except the reserve banks realised). And yes it would be good to get interest rates closer to say 7%. But doing so in a few months will only go one way: a massive crash and then the same emergency rate decreases. Once the RBNZ seriously crash the economy this time I think they will go negative, so I can’t justify fixing long.
I agree with you RE the stupidity of the last 10 years. In fact the only stupider way to 'make money as a country' I can think of would be to pump massive inward migration to boost topline GDP figures while assiduously under investing in the infrastructure needed to support the growing population, gleefully downplaying the actuarial implications and finally slipping out the door to Manhattan or Geneva before the locals open the final bill. Lucky you can't build a ponzi on top of a ponzi aye !
Indeed. The joys of transactional non annuity income. No transaction, no income. Brokers, agents and the owners of both of those businesses, all want/need you to generate commission. What that sector and the sellers do not yet fully grasp yet is its not a matter of wanting to buy, its a matter of not being able to. Every OCR increase drives the threshold lower, and lower and lower. Sellers expectations based on cheap debt endless price growth model and delusional. Owners are still clearly in the bubble phase "denial". The question is does the "capitulation" start in late 2022 or in 2023
OCR to 3.0 today and a increase in forecast to 4.5. How dem apples...?
'Fisher Funds head of fixed interest David McLeish notes that inflation is a year-on-year percentage increase figure, and you only need prices to stabilise to see a dramatic fall.'
https://www.stuff.co.nz/business/opinion-analysis/129583058/dileepa-fon…
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