What does rising interest rates really mean?

Higher interest rates hit borrowers, but there is another angle: you now need to take real risk to make real money. That doesn’t seem like a bad thing. Making money without taking real risk when interest rates were low and kept asset prices heading north just made life too easy and, in many instances, artificially camouflaged poor investment decisions.

A helping hand

The Reserve Bank is looking for help from the government in their crusade against inflation. Spending more will add to demand and inflation. Better migration settings, less spending, and welfare reform are examples of initiatives that could help.

Containing spending is difficult though when cost of living price increases are requiring sizeable public sector pay increases, society is demanding cost-of-living support, maintaining government service levels just costs more, and an election is around the corner. The more the government spends, the more work the Reserve Bank must do.

A wall of pain

A significant number of mortgage holders will refinance in the coming year. This includes around $120 billion of owner-occupier loans and almost $50 billion of property investor loans, representing almost 50 per cent of all loans. The yield on bank fixed mortgage books was 4.37 per cent in February, up from a low of 2.8 per cent. Fixed lending rates are above 6 per cent. Ouch!

Moving in the right direction

The annual inflation rate eased to 6.7 per cent, the first time it has fallen below 7 per cent in almost a year. Lower fuel prices and some discounting helped. Various core measures, which strip out volatile items such as fuel, eased a tad. But there remains a sticky element to inflation, with non-tradable or domestic inflation and what the Reserve Bank really influences accelerating to 6.8 per cent from 6.6 per cent. Service sector inflation, which is influenced by wage costs, rose from 6 per cent to 6.1 per cent.

Take that

A 50 basis points hike in April from the Reserve Bank sent a clear message: inflation is still too high. The antidote is unfortunately a deeper economic adjustment and hitting mortgage holders is one avenue monetary policy works through. Mind you, with inflation now heading lower, the question will be asked, has the Reserve Bank now done too much?

We’re back

Provisional migration estimates for the year ended February 2023 were arrivals of 152,900 and departures of 100,900, netting an annual migration gain of 52,000 compared with a net loss of 19,900 a year ago. That resembles pre-Covid numbers and will add to housing demand.

Looking for a base

House prices continue to fall, with the REINZ house price index dropping 0.9 per cent in March, taking the annual decline to 13.1 per cent and 16 per cent down from the late 2021 peak. However, there were some signs in the data of a base being near, with the volume of sales rising in the month and median days to sell easing lower, although remaining well above average. Auction clearance rates in Auckland are lifting, we have surging migration and the interest rate cycle is close to peaking.

Divided we fall

Tough times and difficult decisions are around the corner. Drop the recession narrative and let’s talk about a reset, which could unlock opportunities. Effective policy-making and stable political institutions enable governments to make difficult decision in times of economic challenge and take measures to correct imbalances. Division across an economy, politics and society does not, which is what we have. How we heal as a nation could be a real challenge. Division will exacerbate and prolong economic challenges.

Turning down

The residential construction cycle is turning. There were 2,972 new homes consented in February 2023, down 29 per cent compared with February 2022. The trend is down. In seasonally adjusted terms, the number of new homes consented in February 2023 fell 9 per cent compared with January 2023. This follows a seasonally adjusted fall of 5.2 per cent in January 2023.

Buckle up

The International Monetary Fund is projecting sub-par growth over the coming years for the global economy, but growth nonetheless, and issued the following warning. “The risks are weighted heavily to the downside, in large part because of the financial turmoil of the last month and a half,” said Pierre-Olivier Gourinchas, the fund’s chief economist. “That is under control as of now, but we are concerned that this could result in a sharper and a more elevated downturn if financial conditions were to worsen significantly.”

Boosting up

We await the boost to construction from Cyclone Gabrielle and earlier floods in Auckland. While one element is that the construction sector (residential) is turning down, it is about to get a sizeable leg up from Mother Nature-related events.

Looking for the strain

Bank non-performing loans remain low at 0.4 per cent of total lending. For housing, 0.3 per cent of loans are characterised as non-performing. While we can point to the odd article involving collapsed construction companies, we are not yet seeing real stress. That could be the 2024 story, not 2023. Monetary policy (interest rates) take time to hit the economy.

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