Housing -- mortgage rates are rising; incomes are getting squeezed

The reality of the battle against inflation became evident yesterday as banks began to raise mortgage interest rates.

Those raises – rates are near double what they were a year ago — mean that household incomes are starting to get squeezed, and the prospect of a recession looms.

A leading economic forecaster said yesterday that all that might prevent a recession would be a resumption of international tourism over the summer months.

With high aviation fuel costs and therefore high airfares, congested airports and uncertainty about the future of Covid that resumption cannot be taken as a given.

Otherwise, the Government would be going into election year presiding over a recession, an almost sure-fire way to lose.

With both ASB and Kiwibank announcing mortgage rate increases yesterday, their customers’ repayments will have gone up by more than 20 per cent over the past 12 months.

ASB has lifted its variable rate to 6.35 per cent compared with 4.04 per cent last July.

On a $750,000 mortgage, that would mean an additional $827 in monthly repayments.

StatisticsNZ said yesterday that expenses like this were starting to bite.

Households spent nearly every dollar of their income in the March 2022 quarter, as the ratio of saving to disposable income approached zero, Stats NZ said.

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Seasonally adjusted household savings in the March 2022 quarter decreased as a rise in disposable income was outpaced by continued growth in household spending.

“During the pandemic, household saving was relatively high. Limited access to shops and services decreased household spending. At the same time, government subsidies supported household incomes. Saving decreased in the March 2022 quarter as household spending surged,” national accounts institutional sector senior manager Paul Pascoe said.

But Wellington economics consultancy, Infometrics, sees more worries with the squeeze on household spending.

“Households are coming under massive pressure from rising interest rates, a housing correction, and an inflationary squeeze on their budgets,” said Infometrics Principal Economist Brad Olsen.

“We estimate that the average mortgage rate currently being paid by households has increased from 3.0 per cent to 4.2 per cent since August last year, but it will climb to 5.7 per cent by the second half of 2024 as homeowners face refixing at substantially higher rates.

Infometrics expects inflation to take longer to get back within the Reserve Bank’s 1-3 per cent target band and is forecasting inflation to still be over 6 per cent at the end of 2022, above 4 per cent at the end of next year, and over 3 per cent in December 2024.

“Some of the inflationary drivers, such as supply chain disruptions, high energy prices, and elevated shipping and freight costs, are beyond the Reserve Bank’s control,” Olsen said.

“Even so, the wide imbalance between demand and supply needs to be shrunk before inflation will be brought back under control.

“Domestic-based inflation remains high and a key driver of sustained higher inflation.

“Unanchored inflation expectations continue to challenge New Zealand’s ability to shut inflation down swiftly.

“The economy is trying to do too much with too little, and demand needs to reduce closer to what the economy can supply if we’re to limit price increases to more manageable levels.

“If the supply issues become more permanent, there is an even greater need for monetary policy to tighten further to ensure that aggregate demand is brought back in line with the economy’s capacity to supply.”

Infometrics chief forecaster, Gareth Kiernan, told POLITIK that if New Zealand were just its domestic economy, then we would be headed to recession.

 “I think that over the next probably 18 months or so, you’re going to be going to struggle to achieve much growth,” he said.

“But tourism receipts and therefore services exports are going to rebound, particularly through the summer period coming up.

“That means you’re almost guaranteed to achieve positive economic growth.

“So if you look at its domestic spending, it’ll tell you a recessionary picture.

“But fortunately, the GDP numbers won’t quite look like the same picture.

“So it’ll feel quite different depending, you know, whether you’re a domestically focused business or whether you’re in one of the small sections of the economy, which is going to actually experience better demand conditions over the next couple of years.”

But there is no guarantee that there will be a tourism revival.

International oil prices are keeping airfares high; congestion at airports is a discouragement to travellers, and there remains uncertainty about the future of Covid.

But Kiernan says there is also a risk that if demand does beat those odds and rebound, we might not have sufficient workers to be able to meet it.

“How are they actually going to resource themselves as demand picks up, given that everyone across the economy is screaming out for workers, and so that it’s going to be a challenge as well,” he said.

Infometrics has found that staff shortages are now the major issues confronting New Zealand business.

“Our experience over probably the last four or five months is that the dialogue with people in business that we talk to has shifted from Covid being the number one concern, and maybe that was nine months ago, to cost pressures and supply chain disruptions to in fact now, there’s a shortage of labour right across the board,” he said.

“In terms of losing people to Australia, when you look at for any young person who doesn’t own a house, you look at living costs in New Zealand relative to incomes, you’re not tied here by property; in fact you’ve probably got a better chance of finding property across the Tasman given that the relevant incomes as well. So I think there’s real, real ongoing risks in that space.”