Rates pain: Borrowers on edge as Reserve Bank calculates its next move

1. Could this be the last cash rate rise in the cycle?

All eyes will be on the Reserve Bank at 2pm this Wednesday, when they’re likely to announce another increase in the official cash rate (OCR). My punt is that the rise will be 0.25% (taking it to 5%), but with inflation not dead yet, it’s not totally out of the question that they raise it by 0.5%. However, the bottom line is that there are also now fairly clear signs of a faltering economy, while the recent global banking sector problems also point to a more cautious approach from the RBNZ.

Indeed, it’s not impossible that this OCR rise (regardless of size) is actually the last for the cycle, especially if the Q1 2023 inflation data (due April 20) shows a clear slowdown. And of course, for borrowers, it may all be academic anyway, as it now seems very likely that mortgage rates have already reached a generalised peak.

At the same time, though, the RBNZ won’t want to run the risk that financial markets start to “price in” OCR cuts in the near term (which would undermine their inflation fight to date), so the language in Wednesday’s statement is still likely to be tough-talking. For borrowers, even if the current 6.5% or so is the “worst case” for mortgage rates, don’t necessarily expect them to fall sharply soon either.

2. Riding the repricing wave

That “higher for longer” peak for mortgage rates will remain a key theme for the property market, especially given the continued wave of existing borrowers that need to reprice over the rest of 2023. Many borrowers will have already repriced from the ultra-low, post-Covid rates of 2-2.5% onto something closer to 4% or more. But this still means another increase yet to come (given that current mortgage rates are around 6.5%), and the size of the wave is large – about 50% of existing mortgages are fixed but due to reprice within the next 12 months.

3. A ‘job-full’ recession?

As expected, the hefty 0.8% rise in (seasonally adjusted) filled jobs in January wasn’t repeated in February, with recent Stats NZ data showing last month’s rise coming in at 0.4%. Yes, it’s a slowdown. But 0.4% is still a healthy number and adds to a tentative sense that this (possible) recession might be “job-full”, with economic activity sagging but firms trying to do whatever it takes to hold on to their current employees (given skills shortages). The mortgage repricing wave means a serious adjustment to household finances, but at least job security would be a big help.

CoreLogic NZ chief economist Kelvin Davidson: “The mortgage repricing wave means a serious adjustment to household finances.” Photo / Peter Meecham

4. Confidence measures are still a mixed bag

Meanwhile, last week’s business confidence measure from ANZ showed sentiment was pretty flat in March, at a low level. No surprises there. Perhaps more interesting was tentative evidence within the cost/price measures that inflation pressures might now be dissipating, albeit slowly. The RBNZ will be pleased to see that ahead of their next official cash rate decision this week and the next benchmark CPI figure on 20th April. But the evidence is not all in one direction – ANZ’s consumer measure showed a drop in sentiment and a rise in inflation concerns.

5. Climate change effects on the property market further emphasised

Finally for this week, more Reserve Bank analysis (pre-dating Cyclone Gabrielle) has recently been released on the possible effects of rain/surface flooding and sea level rise on the property market and banking sector. As examples, the RBNZ estimates that about 25% of Auckland properties/mortgages would be vulnerable in a 1-in-100-year surface flood event.

When it comes to coastal flood risk, some regions are more exposed than others. For example, with one metre of sea level rise in a 1-in-100-year event, 10%-plus of mortgages in Hawke’s Bay could be vulnerable, with 7.5-10% in Bay of Plenty and Canterbury. Perhaps most strikingly, in that type of event where the sea rose by one metre, the RBNZ estimates that any properties already at sea level now could suffer “full insurance retreat” and falls in property prices of 80-100%.

- Kelvin Davidson is chief economist at property insights firm CoreLogic

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