With the current inflation rate pressure heading towards the 1 to 3% boundary, the Reserve Bank has decided to leave the OCR unchanged but speculation is rife that it may go up soon. The OCR rate is used as a tool to halt the rise in inflation and when the OCR goes up the mortgage interest rates are used to run after it. ASB see the writing on the wall and have already increased their long term rates. If the past is anything to go by, the other trading banks will most likely follow.
So, you may be asking if this is going to be a long term trend now, are we going to see large interest rate hikes and what will that do to the house prices?
Well let’s unpack this information and look at some of the micro elements that are causing all this commotion. The world’s borders are still closed causing disruptions in the supply chains and resulting increases in shipping costs. These cost increases get added to products and then prices go up causing inflation. With China becoming the world’s factory, we here in NZ can’t do much about that unless the retailers keep swallowing the cost increases which they are unlikely to be able to do.
But how did we get here in the first place I hear you ask? Well, frankly, we can thank Covid. Due to a lack of tourism and business activity in general, leases didn’t get paid, wages didn’t get paid and the Government had to do something drastic to get us back on track. So they decided to do a ‘hospital pass’ to the Reserve Bank and in doing that sold a big chunk of debt to the Reserve Bank. In real terms the Govt sold bonds to the central bank and was then all of a sudden flush with cash. They used this cash to distribute to the populace, in particular business’s to help pay wages, self employed people who can prove a loss due to covid and many other incentives.
However, as we all know, quoting Isaac Newton; for every action, there is an equal and opposite reaction and the reaction was in the form of interest rates dropping. The follow on from this was a rush to buy a house and demand quickly outstripped supply thereby casuing property prices to get out of control. The government eventually reacted and hit the property investors stating that interest deductability will be phased out, so that will put an end to easily found positively geared property. This kind of worked a little bit but everyone secretly knew that it would take a rise in interest rates to really stop the tidal wave of prices. Now things have got real and it looks as though this may happen sooner rather than later.
Borrowing the Newton quote again, there is likely to be a scary reaction to this action. There are many people out there who have taken out million dollar + mortgages. With the extra interest eating into their disposable income, they won’t be able to afford to spend like they did before and business will suffer…again. Some may have to sell and go back to renting, put their money in the bank and wait until property prices or the interest rate drops again. But then we will have an influx of people looking for a rental property but wait, where have all the rental properties gone? Oh that’s right, the government put the heat on investors which pushed some of them out of the market which reduced the rental stock. So, demand for rentals will outstrip supply and this will push the rent prices up. The remaining property investors will be pleased as they may once again have a positively geared investment but many others will be cash strapped and will probably have to start spending their newly found equity to survive. The downside is that the poor will get poorer and the rich will get richer, which is a paradox given that the socialist leaning government set out to do the opposite.
On a positive note, the country as a hole looks as though it is doing well and we hope it is not leaning on the cash giveaway, a temporary fix that brings back memories of John Key’s ‘rock star’ economy.
Covid will one day disappear and the world will come right and spring back into action. NZ is a shining star and our land comprising a relatively small population is gold. My advice would be, if not on the property ladder yet, do what you can to get there and fix the mortgage rates for the medium term. In the end, you will win.
https://www.newsroom.co.nz/pro/reserve-bank-stops-printing-money