Reserve Bank Deputy Governor Christian Hawkesby at yesterday's media briefing on the Financial Stability Report

The full reality of New Zealand’s real estate bubble is likely to hit home in a fortnight when the Reserve Bank issues its last Monetary Policy Statement for the year.

The Bank’s Deputy Governor, Christian Hawkesby, suggested yesterday that it would contain a revised house price projection; and logic says that can only mean the Bank is ready to forecast that prices will fall by more than its current forecast of  15 per cent from December 2021.

”We look at a range of measures for sustainable housing prices, and across all of those range of measures, they are still south of where house prices are at the moment,” he said.

“So we see a weaker outlook for house prices.

“We need to ensure that the financial system is not only prepared for that central view, but the range of risks that revolve around it.”

Those risks centre not on prices themselves but on the forces driving them down, which are interest rates, and for those, the Reserve Bank is responsible.

And what is driving the Bank’s response on interest rates is a very buoyant economy, yet in part, some of that buoyancy is a hangover from what we now know has been a housing bubble.

In other figures out yesterday from StatsNZ, the legacy of the house price bubble was evident in employment figures which showed that the biggest rise in employment since September 2020 has been in rental, hiring, and real estate services.

The increase of 17.96 per cent contrasted tellingly with the rise in health care and social assistance, 0.82 per cent and education and training, which dropped by 2.86 per cent.

The real estate employment boom was followed by another legacy of the housing bubble, the building and construction sector, where employment jumped by 13.6 per cent.


But what was clear from the Reserve Bank’s biennial Financial Stability Report, which it released yesterday, is that the golden economic weather induced by the housing bubble is about to end.

But for the moment, the weather is glowing.

Wages are ahead of inflation, and unemployment is at a record low.

StatsNZ said yesterday that average ordinary hourly earnings, as measured by the Quarterly Employment Survey (QES), increased to $37.86 to the September 2022 quarter, an annual increase of $2.61 or 7.4 per cent; current Consumers price Index inflation is 7.2 per cent.

For private sector workers, the gap was larger. Their average hourly earnings went up 8.6 per cent.

The earnings are the product of a very tight labour market, with unemployment continuing to run at 3.3 per cent.

The Reserve Bank’s Policy Targets Agreement requires it to “maintain maximum sustainable employment.”

The Bank’s Governor, Adrian Orr, said yesterday that employment was beyond maximum sustainable employment at the moment.

“This is not a sustainable position,” he said.

But he said the Bank did not target a specific employment level because employment was influenced by the job market, not the Bank.

Hawkesby warned that the Bank was not finished raising the Official Cash Rate.

“Central banks have been tightening monetary conditions at pace to ensure that inflation expectations remain anchored,” he said.

“The extent to which economic activity will slow, and response remains highly uncertain.

“In short,  there are increasing downside risks to the global economic outlook.

“In the face of this, we believe New Zealand benefits from a strong starting point of high levels of employment and a sound fiscal position, but we are not immune to these risks.

“Rising household debt servicing costs and declining household wealth all put pressure on domestic spending in the near term.”

Curiously, the National Opposition ignored the increase in average earnings and elected instead to try and claim that wages had fallen behind inflation.

Opposition Leader, Christopher Luxon, used the increase in the wage index to do this.

The index, which measures pay rates that have been set for positions in workplaces rather than the money going into pay packets, rose only 3.7 per cent.

“It’s no surprise Kiwis are feeling crushed by inflation – prices have now risen faster than wages for nine quarters in a row,” he claimed, ignoring the fact that earnings for all workers were 0.2 per cent ahead of inflation for the September year.

The party’s Finance spokesperson, Nicola Willis, identified the real challenge facing the electorate; mortgage interest rates.

Commenting on the Reserve Bank’s Financial Stability report, she said that among households with mortgages, the average percentage of disposable income dedicated to debt servicing was expected to rise from a recent low of nine per cent to 20 per cent.

The October 22 edition of “The Economist” says a further problem is concentrated pain borne by a minority of homeowners.

“By far the most exposed are those who have not locked in interest rates and face soaring mortgage bills,” it says.

“Half of all New Zealand’s fixed-rate mortgages have been or are due for refinancing this year.

“When combined with a cost-of-living squeeze, that points to a growing number of households in financial distress.”

It is therefore not surprising that the Financial Stability Report conceded that the number of households in financial difficulty would grow as more fixed-rate mortgages repriced and could increase significantly if mortgage rates rose materially above the servicing assessment rates of around six per cent.

The report said borrowers who took out loans when mortgage rates were near their low points in mid-2021 were the most exposed to interest rate increases.

 “However, if mortgage rates rise significantly higher than six per cent, it is likely that an increasing number of borrowers from 2021 will need to reduce discretionary parts of their consumption in order  to continue to service their mortgages.”

The point of the Financial Stability Report was to stress test the banking system to see how it would cope with scenarios like households finding it difficult to make their mortgage payments.

“The 2022 solvency stress test assessed nine locally incorporated banks’ resilience to a simulated ‘stagflation’ scenario involving unemployment rising to 9.3 per cent, 2-year fixed mortgage rates reaching 8.4 per cent, and house prices falling by 47 per cent from their late 2021 peak,” the report said.

“Results from the exercise show that such a scenario would lead to substantial credit losses and some banks entering their prudential capital buffers, placing limits on dividend payments and requiring them to restore their capital positions.

“However, the test showed that even in the worst year of the stress, and before mitigating actions are considered, the aggregate banking system would maintain a higher Tier 1 Capital ratio than typical levels seen prior to the GFC.”

 So the financial system can withstand a substantial hit but the impact on homeowners, particularly those who took out mortgages last year, is likely to be substantially negative.

That in itself will have economic implications as they tighten their belts with a consequential impact on demand and, logically, a negative impact on support for the Government.

The political dimension of the report will get more attention today when Orr appears before Parliament’s Finance and Expenditure Committee.