The Reserve Bank is both forecasting an economic downturn on a similar scale to that of the Global Financial Crisis (GFC) and expecting wage and price inflation to remain stubbornly high for some time, Westpac New Zealand Acting Chief Economist Michael Gordon says.
Gordon makes these comments in his review of Wednesday's move by the Reserve Bank to increase the Official Cash Rate (OCR) by a record 75 basis points to 4.25%. On top of that the Reserve Bank's now forecasting a peak OCR of 5.5% next year, and four consecutive quarters of negative Gross Domestic Product (GDP) from June 2023 onwards.
As the Reserve Bank battles to get Consumers Price Index (CPI) inflation down from above 7% to its target 1% to 3% range, Gordon says Westpac NZ economists are now thinking about the risk the central bank "could end up overcooking it on the inflation front."
"We now expect OCR cuts to begin in early 2024, six months earlier than we did previously. Those rate cuts are both earlier and faster than what the Reserve Bank is projecting," Gordon says.
"Make no mistake, the Reserve Bank is not just signalling a recession, it’s forecasting a downturn on a similar scale to the Global Financial Crisis – different causes, but similar consequences. On the Reserve Bank’s forecasts, economic activity continues to fall below its potential long after the recession has ‘officially’ ended. And the unemployment rate rises by several percentage points – albeit from a low starting point – just as it did in 2008- 09," adds Gordon.
"Even so, the RBNZ expects wage and price inflation to remain stubbornly high in the coming years. Headline inflation is expected to rise further to a peak of 7.5% in the next two quarters, only receding to 5% by the end of next year and dropping back into the 1% to 3% target range in the second half of 2024."
Gordon does say, however, that a lesson from the GFC period is the back of inflation was broken fairly quickly.
"Non-tradables inflation, the portion that tends to be driven more by local conditions rather than offshore forces, slowed quite sharply, compared to where it had been running over much of the previous decade. Wage growth didn’t even peak until 2009, but that is typically the last shoe to drop in the economic cycle. And once it turned, it remained stubbornly low for years to come," Gordon says.
"Admittedly the scale of the inflation problem is greater now than it was in 2008, or indeed at any point in the last 30-odd years of inflation targeting. But we shouldn’t lose sight of the fact that monetary policy works, eventually."
"A growing number of borrowers will be rolling onto substantially higher mortgage rates in the coming months, which will eat into households’ spending power. The next 12 months will be much more telling than the past 12 months have been," says Gordon.
*Note, the chart below comes from Westpac NZ. The table below that is the Reserve Bank's forecasts from Wednesday's Monetary Policy Statement.
100 Comments
I agree with you, however there were few people who saw the 2008 crisis coming before it happened. Most people did not see it coming.
Like the last snowflake that lands on the top of a snowy mountain before the avalanche, it's not that last snowflake's fault, but the system, all snowflakes combined helps to cause the avalanche.
Hopefully it's going to be wonderful, for most folk. Be prudent.
Shadow Government Statistics - Home Page (shadowstats.com)
Personally I think 2023 will make 2008 look like a wonderful year.
Why? NZ had already doubled down on the bubble at that time and behaviors and attitudes haven't changed. The actions of China were ultimately positive for the economic fates of Aussie and NZ. Unfortunately that has fed into the exceptionalism of the the NZ ruling elite and general public. We believed our bubble economics design was infallible.
What's diffrunt this time? Perhaps I'm not reading enough Granny Herald and missing something.
Chinas interest rates are much lower then the US, they cannot allow mass investment to move out of china this time, and I see no 21 year old chineese checkout operators buying properties at auction this time..... perhaps we where "rescued by international investors" who thought our hosuing was cheap on international standards in 2009/10 ish etc , and we where. Now we have one of the most overextended hosuesing markets in the world on a price to earnings metric.
Yep, you can argue cause and effect, but as soon as the stats are solid that unemployment is higher than NAIRU and inflation is firmly on the wane they'll have to refer back to their mandate "to create the conditions that promote full employment and maintain the purchasing power of your money into the future."
They'll reverse direction so fast it'll give you whiplash.
I'm expecting inflation to continue to be stubborn as well. In picking a peak exceeding 5.75. More like 8-9% OCR to turn the ship. That puts rates around 11+. All to allow the averageman to put a roof over his head without endless bank profit driven landlord exploitation.
But hay...let's keep exporting our greatest future tax payers to generate a lifetime of tax in Aussie. And all the while accepting a collapsing health system as a result.
Our ageing workforce coupled with an untargeted migration policies and stretched infrastructure has allowed non-tradable inflation to remain relatively elevated for many years now.
Those predicting a deep OCR cut in 2024 should explain how that doesn't send a supply-crunched economy like ours into a worse stagflation cycle.
the Reserve Bank is not just signalling a recession, it’s forecasting a downturn on a similar scale to the Global Financial Crisis
Given the quality of the RBNZ's forecasting to date, I think we can now safely rule out a downturn on a similar scale to the GFC as a possibility.
They are forecasting OCR 3.8% for December 2022, which is hilarious because it's already wrong. Most of my non wage expenses have stopped rising and a few have fallen. The brilliance of the cpi is that it compares prices to a specific moment in time exactly 1y ago. So it takes exactly 1 year after prices stop rising, for the cpi to stop rising. Most of my costs stopped rising in March-May. I expect March-May next year we will start to see a bit of deflation in the cpi - even though it's been happening for a while now.
I don't think it's just the quality of their forecasting that will give us something that they don't predict. Saying scary words has now become part of their "Toolkit". Their technical abilities are both outdated and limited so attempting to crush the remaining positive sentiment/speculation with scary words has become more important.
I'm not sure why a repeat of the GFC, some 15 years ago, is the yardstick.
How many Kiwis have quite our workforce/retired since then, taking a lifetimes worth of skills with them? And we expect pressure from that to not manifest itself in the current wages/employment stats = 'Spiral' that we are getting?
Obviously not.
(NB: Importing People isn't the answer - long term, or short. NZ isn't alone with this demographic dilemma.)
No doubt.
But the sheer number of 'oldies' is the issue. It increases every day. And we haven't reproduced a replacement workforce, and won't if living costs remain prohibitive. The ratios of young/middle-aged/old aged has turned on its head over the last 15 years or more. We knew it was coming, and it has.
Why didn't we train our workers to replace those who have aged? We didn't need to! We outsourced their jobs, and assumed that we could live from ever-increasing, ever-cheaper Debt, enabled by asset price increases.
The government tried to promote baby making for the past 20 years (a population policy that seems ignored now).
My gut feel is that birth rates are going to fall off a cliff. Not necessarily because of living costs, but because having kids is at odds with the culture of the generation coming through - long term relationships are on the out.
I wouldn't go so far as to say long term relationships are on the out, yes those who choose to have kids generally do it later than in previous generations, as they have more opportunity, and the cost is significantly higher today in relative terms due to higher cost of housing, food, etc etc. Having children takes sacrifice or opportunity cost. The opportunity cost was lower when women couldn't command the level of wages and variety of work types and roles as today, therefore you are losing a lot more income now compared with say 10-20-30years ago, additionally the DTI of 3-3.5 30years ago made it much lower of a cost to have a house and kids. Also it is prohibitive to home-ownership to have a child beforehand as the cost will eat into any ability to save. Throw in the cost of transport, food, in and the fact that in order to have a housing deposit, it usually takes couples years of saving in conjunction just to scrape 20% of your average $800k home and it is easy to see the daunting opportunity cost young couples are faced with today. This is where the generational angst comes in when young people educate themselves and realise the economic set of cards they have been dealt, while watching their parents sail off into the sunset with their 3-10 investment properties.
If the soil in the garden is bad, the plants wither and die.
If you repair the soil, the plants will flourish and bloom.
People are no different.
If we repair society and the economy (bring about social and financial stability), young people will marry and have children (depression, anxiety and suicide stats are linked to this also in my opinion).
But we've made the conditions so bad for that (in what appears to be ensuring conditions are excellent for the boomer generation throughout their lives), many are choosing not to - and rightly so.
Exactly. I often think people get the order of explanation wrong - they think that the fact people choose to partner later is a cause of economic instability (i.e., leading them to buy a house later) rather than a result of it - people are less likely to partner up if they are not able to afford to form their own households as a partnership. Also I think the idea that more education leads women to 'choose' to have fewer children is wrong headed. As you say, more education leads to more income leads to two incomes being required to sustain a household meaning each child has a greater opportunity cost. The way to test this would be to look at women who are both educated and wealthy (and were already wealthy by the age of, say, 25). Are they delaying children until later, and having fewer children? If the answer is no, then it's clearly not education that's the deciding factor, it's wealth. And while this is anecdotal and not a study, amongst my friends and acquaintances there are basically two groups who had kids earlier than mid-30s and or had more than 1 or 2 - those who were already at the bottom financially speaking whose situation was unlikely to improve, and those who were wealthy enough that they could afford to have kids and still own a house and live a reasonable life.
We're past the point where education in women should be yielding meaningful changes in our birth rates. What we're doing now is designing low birth rates into western lifestyles; e.g. the only affordable houses are two bedroom townhouses, and a four bedroom home costs $1.5m in many places across Auckland. Also, the reality that most households must be dual-income to even maintain a mortgage and that drastically reduces the amount of time women can spend out of the workforce.
The whole 'educated women don't want children' thing is willfully overlooking how hard it is we are making for it to even be an option to have a family in the first place, regardless of how badly some women might want to. In that regard, they have even less choice than women did 20 years ago, and that itself is being dismissed as simply a flow-on effect of them being more educated. We are past that point and have been for some time.
It seems the only ones that haven't worked out that we are in for some real recessionary pain is Robbo and his Labour Party mates, or at least they don't want to admit it which just erodes away any small amount of credibility they have left.
My view has always been that this inflationary beast will not be tamed as easily as some may think. We have upstream primary sector inflation running at a much higher rate than our CPI, we have wage inflation and we have a govt that continues to spend like a drunken sailor, which will only accelerate in the lollie scramble leading up to next years election. They do not care about inflation, they care about votes.
just before the gfc the NZ mortgage rates got to 9's, in response to the GFC the RBNZ cut rates massively.
Queue 2023 , everyone's fix is about to explode upwards just like the Adjustable Rate Mortgages in the US did which triggered the so called subprime collapse, which moved to mainstream mortgages as well.
The RBNZ is forcasting 5,5 - 7-8% rates are coming, but mortgages in 2008 where A LOT SMALLER.
ITS GOING TO BE WAY WORSE.
Was talking to someone yesterday about their mortgage coming up for refixing in 6 months. We calculated they are at a DTI of 5 currently, to their gross income.
If the OCR hits 6% (as some of the banks are predicting - personally I agree with you IT GUY), their re-fix is likely to be around 8%. At which point they are spending 40% of their gross income on interest alone, excluding the principal portion of their mortgage.
But they think they're sitting pretty because their house has doubled in value since being built 2 years ago. It won't matter what they think it's worth if they can't pay for it.
And that's at a DTI of 5. Imagine what the effect on all those people with higher DTIs will be - which my paper napkin guesstimate from C40 was 60% of last year's borrowers, and heavily skewed towards investors.
Exactly. We are a nation that generates money by buying and selling houses. Where the profit has been generated not by work, materials or land value increasing . but instead the profit was generated by low borrowing costs, poor controls on debt levels ( to income) and a ridicilously low interest rates. And a belief that house values keep rising.. lol.
Central and local Government spending has exploded..but similarly it relies on borrowed money and taxes mostly generated from making, buying and selling houses. Which will evaporate or be expensive to service
Immigration wont help..the young rich and skilled talent is in demand and we have zilch to offer vs wealthy well managed countries . We will get cheap, poor and unskilled labour if lucky.
Get more popcorn
Perhaps this is the only way the economy can try to exit a situation where too much debt exists. The alternative is almost total economic collapse. They will cut and print before that happens. Imagine if the risk profile of NZ banks is considered too high by international lenders, and the funding costs would be way above the OCR rate to try and stop collapse. IE an OCR of 3 but internationally banks can only borrow at 6... RBNZ becomes the funder of last resort. FLP v2.0 but a tiny bit bigger this time. Or do they pull the BS11 cord ? I doubt that anyone wants to test ride that rocket.
The Bank of England tells us that banks are not intermediaries of loanable funds. https://www.bankofengland.co.uk/working-paper/2018/banks-are-not-interm…
Similar to? This is still the GFC, in the same way that the GFC was the natural result of continually poor legislative decisions. All of the extreme financial events we have seen in the last thirty years was as a result of governments inability to do their job and the belief that they could financially engineer any result they wanted. Just bubbles in the wallpaper; squash one down and another pops up elsewhere. The governments job should be to stop the baddies from stealing from us, that's it.
All the experts here, can someone put in an analysis comparison about how much real estate prices will fall this time if there is a similar down turn as GFC.
During GFC house prices were a lot of lower than now and average salary was quite comparable like 4x of average house price.
In the current scenarios, it's more like 6-7x. So what's the experts view on how much prices can fall if there is a slow down line GFC.
Some good analysis please.
My warnings have been that there is/was a good chance NZ property (and Australia and Canada) could experience 40-50% fall in houses prices in real terms, but I just didn't know when this would happen. So that would be a 30% fall in nominal prices and add in 2-3 years of 5% + wage/CPI inflation.
The path we were heading down from around 2013 was unsustainble in my view (looking at money policy, demographics, irrational exuberance and comparing NZ with other previous property bubbles etc) so at some point there was a reasonable chance this would happen. In my view it was a greater than 50% chance, I just didn't know the timing.
Central banks became far more delusional and created far more damage with monetary policy than I first thought they would, so I though we might have seen a fall in prices back in 2017-2020 period - it has taken much longer than I anticipated for the RBNZ to give in on supporting housing over the real economy.
Now they have turned the corner and the real economy is now more important than housing. There is no point having $1,000,000 homes on average, if your average kiwi can't afford electricity or groceries. But having $500,000 houses and being able to afford the other bills makes far more sense. All that means is the elimination of bad debt in the housing market (that has been supported by ultra loose monetary policy).
But now I think a greater than 50% fall in house prices (in real terms) is a possibility because of just how far out of control we allowed it all to become. It is quite possible (in my view - possible, not probable) that we see 40% falls in nominal house prices (if you run the numbers of an investment property and discount future cash flows at new discount rates) and then add into that 2-3 years of 8-10% wage inflation. That would be a much greater than a 50% fall in real house prices.
Of course if we see a sudden reversal of inflation and interest rates then this won't be the case - but if we have high inflation and a high OCR for the next 18 months, then I think there's a decent probability of significant falls in real house prices (worse than what any bank or the RBNZ is communicating and rightly so because they don't want to scare the horses..)
IO, a good analysis thank you.
My concern is for those who are trapped so far in negative equity. To go bankrupt they will have to quit their jobs, lose their house and then start again. This will be a life changing event for doing the same as previous generations did, invest in a place to live and have a family.
I repeat my plea for focused financial support of the triers, the people trying to make it and contribute to society, we can give 14-18% increases to dole bludgers where is the kindness for those who are useful?
This might look like focused debt relief for those who have bought their first house in the last two years.
Capitalism relies on consequences and personal accountability. People took a risk to buy a property at a particular moment in time which i and many others werent comfortable with. Nobody forced them and certainly noone insured them. Plenty of people counselled against.
Its now vital to let the process run its natural course to kill inflation and lower house prices. We unfortunately need people to visibly fail in order that others fear the same outcome and start to save, prepare for the worsr and invest responsibly... instead of spending up expecting a bailout.
The GFC only saw an approx 10% fall. OCR was cut and people were allowed to break a longer loan and refix at lower rates (the break fee was added to the loan). Everything was done TO STOP a house price correction. They did this as the collapsing house prices in the USA were bringing banks down. Even Goldmans took an emergency loan from Buffet.
This time the RBNZ wants house porices to come down, indeed they forecast 20%, probably conservatively.
If its comparitively shallow like the GFC I think it could stop at 30% average peak to bottom, but I do not beleive this will be as shallow, as there is no global collaboration between major economies to prevent collapse here, rather there is collaboration to stop inflation whatever the consequences.
As always the good houses never fall on average as far as the crappers. Manurewa is going to get clobbered as are the sencondary regions like Turangi 8) and Tokoroa etc.
The danger of generalisations:
A growing number of borrowers will be rolling onto substantially higher mortgage rates in the coming months, which will eat into households’ spending power.
Inflation takes care of the spending 'power' without reducing actual cashflow. Anyone who took advantage of low interest rates to pay down debt faster may not have any change in their mortgage repayments, just a change in the amount of principal paid off. For us the higher mortgage payments point is 9%. Unless the rates go above 9% our spending amount will stay the same. It will just buy 7% less, or we'll drive 33% less to cover it.
It (the housing market) might need to live in the real world TK - and not in the ZIRP delusional world that the central banks fostered post GFC - now.
Waking up is never easy, especially from a wonderful dream where everyone gets rich by avoiding economic realities.
We needed the recession back in 2020 also there TK (inverted US yield curve suggested it was coming well before COVID arrived) - but instead we decided to kick the can, probably ensuring that when recession does come, it will be far worse than it would have been if it were naturally allowed to happen earlier.
Destroying the business cycle appears to have become the aim of monetary and fiscal policy - which is a bit like fooling yourself that you're god and can control the universe.
I_O,
Indeed. This is perhaps the one shot NZ has of getting the housing genie back in its bottle-permanently. It's going to be painful, but if we are to have an economy not built round property, then it's got to happen.
What I fear is that the RB gets it wrong yet again when it starts to dial rates back and overshoots on the downside, restarting the whole sorry cycle again. The notion that property is the only game in town seems to be hard-wired into the Kiwi mentality.
Yes agree although looking at the US 10 year bond year, it appears that we've broken out from a 40 year trend which may make it difficult for your fear to play out.
Possible of course and I've had the same thought/s.
Although the more QE the US takes part in, the more unstable the world is going to become (if not unstable enough already). More countries will want to go to war with them to end the USD dominance.
The idea of having a floating exchange rate is that the value of the currency will decline and this should should also help to correct trade imbalances. It only becomes a problem once foreign entities decide that they no longer wish to accept said currency for trade. NZs currency is also a sovereign currency as it is not on a fixed exchange rate or pegged to another and we hold little foreign debt.
My prediction is that central bankers will repeat the mistake of the early 1970's. They will raise inflation targets to 3-4% to appease their political masters and when inflation meanders down to 5% they will say "close enough is good enough" and will start cutting rates. However if you don't kill inflation dead but just bury it in a shallow grave still breathing, it eventually climbs out of it and comes back stronger than ever. The end result is 10-15 years of raising rates, entering recession, cutting rates, higher inflation, raising rates, entering recession, cutting rates .... until finally someone goes full Volcker and interest rates end up at 20%.
He's also said he doesnt plan on putting the US into recession. So he thinks he can do "something different". The end result of that will probably be even worse as the Law of Unintended Consequences finds a way to kick in. But it also shows he doesnt have the stomach to do the hard stuff and will fluff around looking for alternative options.
IO, I recall you said recently that we may be looking at a period of short cycles between high inflation and low inflation/deflation. Similar to the decade of so following WWII. Seems like moving too slowly may end up rocking the boat vigorously over the next 10years if we continue to over/under-cook our response.
I think you're probably right K.W. I also think the public and politicians are likely to be far less tolerant of the austerity needed to bring inflation down - weak demand and high unemployment - than they perhaps were back when the Reserve Bank deflated the economy in the late 80s. That's a recipe for under-doing it ...
Orr leaving the building...
I find it extremely odd that there is a high correlation between the date that the Fed board were banned from trading the markets, to the date that they switched from being ultra-dovish to ultra-hawkish.
They will say its just chance, that they decide to start lifting rates after they were banned from trading - but its almost like they have no care at all now in the price of assets now that they can no longer benefit from trading them.
Inflation was 'transitory' while they were allowed to trade the markets - and pretty much at the moment they were banned - 'Oh look inflation! Lets raise rates and cause a recession and destroy the price of assets'
Could be purely chance, but it all seems a bit too much of a coincidence.
Agree, the 75 points yesterday, and predicted track to 5.5% OCR, is enough that the economy will stall about March. Those flying too close to the ground will crash and burn, those higher up still need to recover from the stall, and the landing will be hard.
JA and Robbo will say they have it, but no one in the pilot's seat has it in this circumstance.
Circle the wagons, start a vege garden and home brewing.
What is this economist true
https://fortune.com/2022/11/23/how-bad-economy-recession-top-economist-…
I highly rate Mohamed El-Erian and followed him since well before the GFC.
Everything he says here makes sense. He has a way of sumerizing complex economic systems, and he is right that we don't necessarily understand the impacts the three major changes he lists will cause.
I would add that some of the changes, or impacts of them, may be politically unacceptable to Governments or entire populations. He is, IMHO, hinting that these impacts may be hard, violent and lead to a lot of physical pain, not just economic pain.
3 trend -
Insufficient supply - There will be a finacial and perhaps physical fight to ensure major economys get the resources they need/ this may include battering between blocks of countries.
End of unlimited liquidity to solve economic problems - think end of cheap housing loans here.... now the rubber hits the road and economic pain begins in most countries.
Fragility of markets - means that the two above are going to impact your savings, equities bonds etc, and that no one can fully understand yet the full impacts of the above two, yet the markets are not in a good place to deal with them
He is right that private equity and hedge funds may be about to have their funding pulled/reduced, this deleveraging could have profound effects as they run massive leverage with printed money, often these macro level trades are based on long believed corelations that have held well in steady state markets. They are often entered and managed by derivatives. Now it has to unwind. And the expected corealations may not hold. What could possibly go wrong.
My opinion is that not many could control markets and globalisation on the way up, even fewer will be able to predict or control the coming deglobalisation and definancialisation of everything. Did I mention the derivatives based on years of steady state interlinkages...... suddenly your hedge becomes a massive loosing position, with no corealation to what you were hedging.
Makes you glad you live in NZ, we have plenty of electrical energy from Hydro and plenty of food. We are not too exposed to sea level rise. Most of our pain will be economic, and thats only money!
Agree - the US 10 year yield breaking out of a 40 year down trend could be a sign that the entire financial system/global economy is now heading in a new direction - unlike anything many people have seen in their working lives.
Increasing - not decreasing cost of capital.
No mention in the item about the money that commercial banks create which is what monetary policy is designed to regulate. A large failing of mainstream economics is that they don't understand banking, they only see banks as intermediaries of loanable funds and not as creators of money in their own right.
I suspect you'll find most people aren't listening. And those without mortgages don't give a stuff, so they'll keep spending and buying what they need then want.
It's really a very small percentage of the population that are going to feel the full brunt of what's happening first, and will take a considerable amount of time to work it's way to the general populace.
People buying less doesn't necessarily mean prices will drop, as businesses will try to maintain revenue - and inflation is about the price per item, and not the quantity purchased.
They will keep hiking until the recession occurs. It's the history of reserve banking. If you run a Fiat money system you fear inflation like a vampire fears daylight. The fiat issuer can only pay the increased interest on their debt by printing more or higher taxes. Inflation threatens to end the entire game as those who hold that fiat switch it to something else before it's worthless. Inflation can never be allowed.
Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
It's something special to stand in a bank data centre, and see thousands of flashing lights, and the noise of mainframe fans. And realise that all that money is just ones and zeros on a disk pack in a raid drive ( that is replaced by another if it fails for nothing)..... it's all just fairy dust. Fairy dust that cannot be seen to be inflating..... least it's converted to another form of fairy dust via an FX transaction. If you are lucky in life you swap your fairy dust for a property with no mortgage on it.
More faith then a catholic church
The RBNZ OCR rate has increased 1,600% since 2021. Inflation has hit everyone's bill at the big yellow shed. Mortgage rates have gone crazy.
A large section of millennials have less disposable income, no savings, a ton of bank debt, an obligation to the BMD (Bank of Mum and Dad) and an asset that’s actually falling in value. FOMO victims.
NZ mortgage fixed terms are woefully short at 2 years or less. Compare them to the common fixed terms in USA (30 years) or Canada (5 years). Keep in mind that Canada is in a very bad spot with loads of folks piling debt on their line of credit to buy, you guessed it, more property. Almost 60% of mortgages in NZ are already on 30 year amortizations. Come renewal - there will be no option to extend the period of the loan, only to significantly increase repayment to try and keep up with increased interest costs.
The RBNZ has guaranteed OCR hikes to 5.5%, minimum, in early 2023. Further hikes depend on inflation, employment and GDP data along with the actions of the US Fed, the Ukraine war. Reading between the lines - don't expect any reduction in the OCR in 2023.
Logic tells us a historic increase in the OCR cannot happen, after an unprecedented increase in house prices, without consequence.
Now we wait and see how the property spruikers and house floggers try and spin this. Just look to the properties that are selling over CV, they are almost all the type of homes that cashed up, mortgage free, retired types like to live in. Compare to the homes that are selling well below CV and, in more and more frequent cases, below the last 2 years purchase price - they are the ones that are subject to lending pressures and a simple, logical, forced reduction in how much they can borrow.
In summary - a GFC style crisis.... No.
A GFC style crisis along with high inflation and a rising (versus 2008 lowering) RBNZ OCR. Yes.
I suspect that a medium-term (through to 2024) elevated OCR will be required at 5.5%. The alternative is to send the OCR to 8% for 2 months and then drop back to normal levels of 4% or 5%.
I have searched and searched - but have been unable to find any example, in the last 40 years, where a hyper-inflationary cycle over 7% has been crushed with a OCR of 5.5%. This time it might be different due to the shear amount of borrowing that the average Jack and Jill Millennial have FOMO'ed into - just to put a roof over their head.
Some context here on that 'millennial FOMO' thing - the oldest millennials are now in their 40s. The younger ones are in their early - mid 30s. They've already had to spend years longer saving deposits than before, and after sitting back and watching senior leaders and financial institutions make it clear they would do what they could to keep the party going (PM/FM/RBNZ), they faced falling even further behind and even bigger mortgages when they did buy.
The problem, I think, was the disbelief that they could be left carrying the can yet again. That their elders might throw them to the wolves over and over for their own benefit, or the governments they elected specifically to solve the problem. At what point do you just decide you're on a hiding to nothing, bite the bullet and move on with your life?
With that in mind, I don't think calling it FOMO is entirely fair. In the light of the time, it was an entirely rational response, from people who had been sitting back and waiting for the 'responsible' time to buy for literally years, and a correction that almost everyone had shown they were prepared to throw everything at stopping from ever happening.
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