Economists have warned that the Official Cash Rate (OCR) is set to rise - and rise and rise. And when the OCR rises, mortgage interest rates go up and up.
The Reserve Bank is expected to raise the OCR from 0.25% on Wednesday for the first time since 2014, when Auckland’s median house price was $637,250 many current home-owners had not yet entered the market.
Some experts are picking it could be double trouble for home-owners, with ASB’s senior economists Mike Jones calling on the Reserve to consider raising the OCR by 50 basis points.
Whether or not the Reserve Bank Governor Adrian Orr ups the OCR by 25 or 50 or even 75 basis points next week, most bank economists believe the OCR will be above 1% by the end of the year.
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That would be a huge shock for the 80% or more mortgage-holders who have never experienced anything other than low or falling interest rates, said former BNZ chief economist and OneRoof columnist Tony Alexander.
"Last year the Reserve cut the OCR by 75 basis points after going into an emergency meeting," he said, adding the Reserve may want to go hard to keep the long tail of inflation in check.
But property commentator Bernard Hickey, editor of The Kākā, doesn’t buy the forecasts, although he accepts that Orr will most likely increase the OCR next week.
The driver for the potential rise was Statistics New Zealand's latest employment and wage numbers for the June quarter, which record 2.1% wage inflation, he said.
That spooked economists, said Hickey, who doesn't agree with the urgency in increasing interest rates that has manifested itself in what he calls "collective baying for interest rate hikes to get ahead of the inflation curve".
In addition to wage hikes, the increase in inflation to 3% and unemployment dropping to a very low 4% were causing economists to use phrases like “red hot”, “searing” and “boiling” in their latest musings.
The Reserve was being premature and should wait to see the “whites of the eyes” of inflation, rather than make premature moves, he said.
Other countries like Australia and the United States aren’t panicking, Hickey said, adding that the difference in New Zealand maybe runaway house prices.
Lenders typically stress test home buyers on a much higher rate than they actually pay. In theory, home-owners should be able to afford 6% interest rates, Hickey said.
According mortgage adviser Geoff Bawden, of Bawden Consulting, a lift of 100 basis points could result in an extra $416 a month in interest payments for those with mortgages of $500,000.
He said that mortgage-holders who had become accustomed to spending their spare cash may struggle with sudden hikes.
"Some of them are going to get a shock," he said. "If they have been used to spending freely as young people often do with lots of meals out and plenty of disposables, they are going to have to start budgeting better."
