New Zealand homeowners may be sleepwalking their way into financial disaster if they don’t heed Reserve Bank Governor Adrian Orr’s warning to stop spending.
The trouble, says CoreLogic head of research Nick Goodall, is that the actual mortgage rates people pay lag behind the Official Cash Rate (OCR) rises. Because they’re on fixed term rates, homeowners don’t feel the OCR effect immediately and don’t, as a result, change spending habits.
“When you tighten monetary policy, there is a lag effect that doesn't affect the market straight away,” says Goodall. “People are still spending because they still feel wealthier than they did two years ago.
“They're not registering the fact that 'oh my god, my house is worth less than it was in November’. They're going ‘my house is still 30% more than it was in March 2020. So I still feel wealthy. So I'm still spending’.
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“The idea that monetary policy tightening is supposed to make you feel less wealthy, so you stopped spending, isn't working as well as it should in a normal situation, because of their strong growth prior,” says Goodall.
CoreLogic head of research Nick Goodall: “People are still spending because they still feel wealthier than they did two years ago.” Photo / Supplied
Black Friday week spending figures do suggest that some, if not all, New Zealanders have taken Orr’s message to heart. Worldline payments figures for the week of Black Friday overall recorded a 9.5% fall from the previous year, excluding hospitality and food/liquor merchants. But it was still up from pre-Covid levels of Black Friday 2019. Although spending on items such as furniture, houseware and hardware fell, some areas of spending have gone up. The broad grouping of clothing, footwear and personal accessory retailers saw spending go up by 5% this year over the Black Friday week.
In theory homeowners should be able to afford to pay 7% or 8% on their mortgages. Even when mortgage rates were at rock bottom in 2020/2021, homeowners were tested by the banks on their abilities to pay a mortgage at that rate. The reality is that some are finding higher interest rates combined with rising prices for basics too much to handle.
Although still rare, mortgagee sales are happening, even with the test rates, and low unemployment. In some cases it will be due to unexpected changes in the homeowners’ circumstances. They may have had one partner stop work to become a full-time parent. Or some people simply can’t control their spending, even if on paper they have sufficient income to cover the mortgage.
Homeowners should be preparing themselves for higher interest rates, instead of being blinkered, say mortgage advisers. Those that reorganise their budgets now will be best placed to handle the financial shock.
After watching clients failing to acknowledge a pending cyclone of interest rate rises, New Zealand Home Loans Canterbury business owner Emm McCartney coined a saying: "wake up, shake up, and take back control".
“I couldn’t understand why [clients] were sitting on their hands,” says McCartney. “Mortgage rates were increasing and people should have been reaching out, wanting to take some action and get some control for themselves. But everybody was quiet. They had their heads in the sand about what was happening around them.”
While retail spending during Black Friday this year was down on the same period in 2021, it was up Black Friday 2019. Photo / Getty Images
When McCartney sat clients down and went through their budgets she realised they needed to wake up. “You can see by their spending habits that they haven’t woken up. They’re not aware of what’s happening in their accounts.
“When I really broke it down and went ‘wait a minute’, I realised we actually needed to shake some people and say ‘this is real’. At least acknowledge it and stop hiding from it.
“Taking control is getting things back to the very basics. I’m an old-school person. That’s where the fairly old-school basics of getting a highlighter, and going through all the transactions that you can isolate that portion of waste.
“There is nothing wrong with working out, this is what we’ll spend on our food, fuel and fun. In some cases it’s physically drawing that money out and having it in the wallet. And when the wallet’s dry, that week’s spend has been spent. That actually does work.
“A lot of people start to feel they are financially better off once they’re on their spending plan. They don’t have more money. They’re just aware of what they are spending their money on.”
Higher interest rates mean more Kiwis will have rein in their spending. Photo / Getty Images
What homeowners should be doing is revisiting their budgets and voluntarily increasing mortgage payments in anticipation of the rise, or at least paying into a savings account now to ensure they can make the payments when their mortgages roll over, says McCartney. Any extra payments made now reduce the capital owing, which benefits the homeowner.
“Sit down with your mortgage mentor. We’ll simulate what [higher] repayments will look like. We will say: ‘this is what it will cost. Let's start practising now. [Put] that into your savings so you’re not going to get such a shock’.”
Another strategy, which works, is to assign part of any pay rise to the mortgage.
“When you get a pay rise and people right now are getting pay rises, to [put] a portion of that into savings because you're not accustomed to that new pay rate yet,” says McCartney.
