This despite the OCR remaining on hold
The Reserve Bank has maintained the OCR at 5.5%, but the effective total mortgage rate on the entire home loan debt burden of Kiwi households will continue to surge until at least June 2024.
RBNZ tracks, and forecasts, the effective total interest rate that would be paid by a mortgage holder on a mega-loan comprising every residential home loan in the country.
According to RBNZ’s August calculations, the “yield” or total interest cost on the total mortgage debt of households was 5.3%, but the central bank’s forecasts showed it’s got a long way further to rise, Stuff reported.
As RBNZ raises the OCR, it also drives up the loan borrowing costs for households and businesses.
It takes time, though, before the pressure of higher borrowing costs is felt by households, particularly when their fixed-rate periods come to an end, and they have to refix their loans at higher interest rates.
The delayed-action process will result in an increase in the total mortgage yield for households to 6.2% in June, the Reserve Bank predicted.
Speaking at the Financial Services Council Conference on Tuesday, Jarrod Kerr (pictured above), Kiwibank chief economist, said “it’s all a matter of timing.”
“We’ve got 40% of our mortgages coming up for renewal in the next six months, so the impact of rate rises so far is still being felt in the economy,” Kerr said.
A large “lumpy” chunk of that would occur in spring, a time when the property market traditionally becomes active. This will lead to a number of home loans getting fixed in spring and summer, which in turn, will result in many fixed-rate loan periods expiring in those two seasons, Stuff reported.
RBNZ data showed Kiwi households generally fix their loans for a mix of one and two-year fixed periods.
Kerr believed there’s no more need for the central bank to hike the OCR again – a view shared by other bank economists.
“I think the central bank has done enough,” he said. “I think the next move might be a rate cut, but not until 2024.”
Home loan repayment increases reduces households’ ability to spend money on other stuff, which consequently, reduces businesses’ power to raise prices on their goods and services quelling inflationary pressures.
Kerr said that rate hikes in the “first half” of Kiwibank’s mortgage book have already resulted in households that felt it reduced their spending.
“That increase in interest expense is being felt by households,” the Kiwibank economist said.
Banks had around $344.5 billion in housing loans at the end of June. A rise from 5.3% to 6.2% would lift household home loan interest costs by around half a billion dollars.
Kerr said Kiwibank was closely monitoring unemployment, as defaults on home loans, and hence the state of banks’ balance sheets, is closely related to the number of employed people.
Up to around 5.5%, unemployment does not hugely impact defaults, but above that level, defaults increase exponentially, Kerr said.
RBNZ Governor Adrian Orr said the Monetary Policy Committee was confident that with interest rates continuing to stay at a restrictive level for some time, consumer price inflation would go back to its target range of 1% to 3%, while supporting maximum sustainable employment.
Orr said that in the near term, there was a risk that activity and inflation measures did not slow as much as expected.
Record-high levels of immigration plus surging levels of household spending are creating inflationary pressures, according to economists.
Eric Crampton, an economist from the New Zealand Initiative economic think-tank, said increased government spending was creating inflationary pressure.
“It’s increased by about $14.25b relative to what they were saying they were going to be spending in 2019 for this year,” Crampton said. “They are spending massively more than in 2019, and COVID has run through.”
The government had raised more in tax, mainly due to not inflation-adjusting tax rates.
Crampton said the government should reduce spending.
“Retrenching back down to what they were expecting in 2019 would be a good start,” he told Stuff.
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