Bank economists are predicting further increases in mortgage rates as the Reserve Bank of New Zealand comes under pressure to rein in inflation.
This week came the news that New Zealand has narrowly avoided a “technical recession”, with the economy growing 1.7% in the three months to the end of June, on the back of increased spending on travel and leisure activities.
While the revival in economic growth is a positive for the housing market, another set of figures released this week painted a gloomier picture.
Food prices grew 8.3% in August – the largest annual increase since July 2009, at the height of the GFC, when food prices rose 8.4%.
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That doesn’t bode well for the overall inflation figure, which, when last measured in July, was running at 7.3%. The next update of the consumers price index (CPI), New Zealand’s gauge for inflation, will be released on October 18, almost two weeks after the RBNZ is set to make its next announcement on the Official Cash Rate (OCR).
On Tuesday, the New Zealand Herald reported that RBNZ Governor Adrian Orr had become more hawkish on rates following last month’s warning from Federal Reserve chair Jerome Powell that the US would take “forceful and rapid steps” to bring inflation back to 2%.
Bank economists expect Orr will pursue his own inflation mission aggressively, and will push the OCR to at least 4% before the end of the year. That means the RBNZ could deliver two “doubleshot” rises of 50 basis points in its final two monetary statements for this year.
The cash rate hasn’t risen above 3.5% since January 2009 (before then, cash rates of between 5% and 8% were the norm), so anything four and above will be a shock to many Kiwis.
Mortgage rate headaches
Some banks have already priced an OCR peak of 4.25% into their mortgage rates, but some will be caught off guard if the RBNZ goes above that level before the end of the year. The biggest financial headaches will hit homeowners coming off of lower fixed rates, but new buyers will also have concerns about their ability to service a mortgage in the current environment.
ANZ’s economists believe inflation woes will force the RBNZ into taking drastic action, writing last week: “It’ll need to keep hiking to at least 4% by the end of the year in order to better balance wage-price spiral risks against hard-landing risks.”
RBNZ Governor Adrian Orr speaks to the media in the US last month. Most experts have noted his hawkish tone in regards to inflation. Photo / Getty Images
ASB chief economist Nick Tuffley doesn’t believe that the OCR “Blitzkrieg” will come to an end any time soon, with both his bank and BNZ predicting OCR peaks of 4.3% to 4.35%, which would have a flow-on effect on mortgage rates.
Likewise, Kiwibank’s economists believe there is a “very real risk of the RBNZ not stopping at 4%”, although the rises might come in smaller 0.25pt increments. “The RBNZ is not yet done. They’ve made that unambiguously clear,” says the bank’s chief economist, Jarrod Kerr.
Westpac economists, however, were in their latest commentary, from September 12, sticking with the prediction of a 4% peak for the OCR.
With most homeowners’ mortgages on fixed interest rate periods, it takes a while for the ongoing increases in the OCR to work their way through to their repayments. According to ASB economists, more than half of outstanding fixed-rate mortgage terms will roll onto a new higher interest rate over the next year, although the bank believes the added debt-servicing burden “looks manageable”.
Can the RBNZ get inflation under control? ANZ says there is no single factor to blame for the country’s inflationary woes, while Kiwibank notes there has been positive developments, with shipping costs falling and capacity increasing with more ships delivering goods.
Kerr says: “Global shipping costs were one of [the many] catalysts for rapidly rising inflation during the pandemic. The sharp fall in shipping costs, and easing of pressures on supply chains, will be a welcome development for importers and exporters.”
Housing price falls
The banks see no real change in the state of the housing market. House prices are continuing to fall at “an orderly pace”, dropping 8% from peak. ASB, which is predicting a 12% fall from peak, says market confidence is crumbling at the same time, hitting a 13-year low. “We’ve previously marvelled at just how resilient the public’s house price expectations have been over the past few years. Despite all manner of housing health warnings and policy changes, Kiwis remained steadfast in their belief that house prices would keep on rising,” the bank’s economists noted.
Kiwibank chief economist Jarrod Kerr: “The RBNZ is not yet done. They’ve made that unambiguously clear.” Photo / Fiona Goodall
There have been reports of an expected spring revival but Westpac doesn’t think the market will spring back to life any time soon. “The low level of sales, increasing inventories of unsold homes, and a rise in the time to sell all point towards a further easing in sale prices.”
With interest rate rises expected to resume in the closing months of the year, that will keep some downward pressure on the housing market as homeowners’ wallets are squeezed in the mortgage belt, says ASB’s Tuffley.
There are worrying signs, too, for the building sector. Westpac notes that while house building is continuing at a rapid pace, conditions in the construction industry have changed and a slowdown is on its way.
“The ground has shifted under the construction sector with changes on several big fronts,” says Westpac senior economist Satish Ranchhod, citing price increases in materials and staffing. The lack of skilled workers is also an issue, and poaching is pushing up labour costs, while rising interest rates and tumbling house prices will add to the difficulties faced by builders in completing projects.
