With the caveat that I’ve never conducted any sort of systematic demographic analysis of my audience, I think it’s fair to assess that the vast majority of my readership resides outside of New Zealand.
Assuming that’s true, it’s probably also true that most readers don’t stay up at night worrying about whether New Zealanders are having trouble servicing their mortgages. But that’s something that matters, and not just because we should all try to have empathy for those struggling to pay the bills.
New Zealand’s housing bubble is the stuff of legend. Along with Canada, Sweden and Australia, the market is very vulnerable to rising rates, and as you might’ve noticed, rates have been rising lately. The moment of truth for the ominous juxtaposition between sky-high prices and ever higher rates has seemingly arrived. It actually arrived last year, particularly for Sweden, but RBNZ is unrelenting in the inflation fight.
Although Philip Lowe spared Australia an 11th consecutive hike this week, Adrian Orr wasn’t in the pausin’ mood, if you’ll excuse the brief lapse into colloquialisms. Instead, Orr surprised markets with another half-point hike on Wednesday.
OCR is now 5.25%. I don’t know what RBNZ considers neutral these days, but at the least, you’d be inclined to think policy is well into restrictive territory.
Or maybe not, because inflation isn’t responding. Instead, it’s “still too high and persistent, and employment is beyond its maximum sustainable level,” according to the new RBNZ statement. “The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term.”
The economy contracted by triple the expected rate in Q4 (more than that if you go by RBNZ’s forecast), but inflation is still more than double the high-end of the target band.
RBNZ is fairly serious about correcting this problem, and the statement language typically reflects as much.
On Wednesday, they insisted there’s “no material conflict between lowering inflation and maintaining financial stability in New Zealand.” They were compelled to mention mortgages. “While increasing, arrears… remain at low levels,” the bank said.
That’s true, but they’re up pretty sharply from the lower levels seen around the peak in home prices, according to Centrix.
“Our latest data show mortgage arrears climbing for the seventh consecutive month, which could point to many being unable to service these higher mortgage rates,” Keith McLaughlin, managing director at the Auckland-based credit bureau, said. “We are really starting to see some hardship.”
The central bank expects the peak-to-trough decline in domestic house prices to be almost 25% by early 2024. Prices peaked in November of 2021 — so, around the time a lot of other bubbles peaked, including the crypto bubble.
Needless to say, refis aren’t going to be pretty, and if you have a floating rate, the situation is worse.
Lower prices and higher payments aren’t a great combination.
“We see today’s RBNZ hike as further cementing the likely recession that New Zealand faces,” HSBC said Wednesday. “The sharp downside surprise on GDP [in Q4] was not enough to deter the bank from delivering an oversized hike, nor, seemingly, was the global financial market volatility since mid-March, which is likely to lead to tighter financial conditions.”
RBNZ indicated it’ll be data dependent from here, but what I wanted to emphasize Wednesday is that this is a kind of lab experiment for what happens when a central bank persists in the inflation fight despite what, in my opinion, is a clear and present systemic risk. We’ll see how it goes.
