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As long as interest rates don't rise appreciably, our housing market should be fine. Probably. But inflation is the wild card. Potentially very wild

As long as interest rates don't rise appreciably, our housing market should be fine. Probably. But inflation is the wild card. Potentially very wild

Did we go too far this time?

That's the nagging question I have. Unfortunately, it's going to take at least 12-24 months to even begin to know the answer.

But it's nagging.

Has the latest enormous property buying bender been the one that finally brings us unglued?

I've found two recent RBNZ-sourced graphs to be a source of great discomfort. And I run them here side-by-side. (Click on the little magnifying glass logos to see them in full-sized glory.) I have previously written about both graphs, see here and here.

The two graphs are not directly related, as such. But they both show an interesting and disturbing fact; we've broken from historic patterns. Well and truly.

The graph on the left shows our housing market has effectively disconnected itself from the rest of the economy.

The graph on the right is, I think even more disturbing.

Frankly I was quite surprised to see, reading the detailed stats that went into the graph, going back to the start of 2004, that a 20% deposit on a median house had never taken up more than 175% of disposable household income - till February of last year. And now its up over 220%. 

Hot markets

Remember, that 2004-2021 timeframe takes in some pretty hot housing markets, notably the mid 2000s and the mid 2010s. But even during those times the deposit to income ratios stayed generally within a range. Now we've broken right out of it.

The big difference is the super-low interest rates now.

We know, quixotically, that even as the amounts of debt taken on have become more eye-watering, so, the ability to service the debt has become easier.

According to the RBNZ's key household financial statistics, in 2020 interest servicing costs took up just 6.2% of household disposable income. That's an all-time low in a data series that goes back to 1999. And that 6.2% figure compares with over 9% during the mid-2010s housing boom and well over 10% (and hitting a peak of 13.7%) during the mid-2000s housing boom.

Here's a key quote from the RBNZ's recently released Financial Stability Report:

House prices seem less sustainable than before the recent rise for several reasons. Larger house deposits are needed to get into the market and this is making it difficult for first home buyers (FHBs). The Government’s recent changes to the bright-line property tax and to interest deductions from rental income will dampen investor demand for housing over time. While the interest costs on mortgages are low and interest rates have generally fallen more than rental returns, interest rates could rise if the economy continues to strengthen and inflationary pressure builds.

Ah, if inflationary pressure builds...

The RBNZ has given some examples of the impact rises in mortgage rates could have. 

First home buyers could, in this example, see their mortgage costs rise from a little over 30% of disposable income now, to 43% with an interest rate of 5%, and up to well over 50% of disposable income with mortgage rates of 7%. And 7% is not a far-fetched figure. One-year fixed rates were just a touch under 10% just before the global financial crisis in 2008.

The figures for other owner-occupiers are fairly similar, while as the graph shows, the rises are more extreme for investors. They would see the share of disposable income go from 40% now to 56% at a 5% mortgage rate and 70% on a 7% rate.

So, that's a bit scary.

How possible is such a scenario?

Well, it really depends on inflation.

Central banks around the world are attempting to convince everybody (and themselves?) that the current pricing pressures we are seeing - largely as a result of supply chain disruptions due to Covid - will be temporary.

Collectively central banks at the moment seem happy to let economies run a little 'hot', firstly to let them recover from the Covid shock and secondly, to allow the central banks time to be convinced that the levels of inflation they would like to see (IE in NZ it's 2%) would be locked in and not just fade away as has been recent history.

Will this time be different though?

Considerable pressure

The pricing pressures that are being seen globally, and that can be observed in NZ (note the latest ANZ Business Outlook Survey) are considerable. Central banks are trying to 'look through' them, but will the people paying these higher prices 'look through' them? Does this wave of inflation lead to a secondary wave of inflation as the response from those on the end of higher prices is to raise their prices? And does that then lead into higher (also inflationary) wage expectations?

If the inflationary genie really got out of the bottle, the only logical response would be interest rate hikes.

If the RBNZ was faced with such a scenario it would really be in a jam. Mortgage holders would be much more affected by rises in interest rates from these historically low levels than they have been at other times of rising rates.

So, it remains to be seen if the great post-lockdown buying spree of 2020 (and running into 2021) was one spree too many. 

We've once again doubled down on the housing market. And we are potentially exposed.

Let's hope the central banks are right about the current wave of inflation being temporary...

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Housing have soaked up the economy...

NZ Main industry: Housing

... successive governments have allowed the Kiwi housing market to become " too big to fail " ....

Can't wait to see the lengths Jacinda & Robbo will go to when house prices start failing....

.... an across the board real estate freeze ? .... oh , that'd be hilarious !


Let prices keep going higher so in the end one rich person owns every single house. Then at least the slumlords will see what hell they have unleashed on the poor.


Its the buying power of $ thats trashed.

Let's hope the central banks are right about the current wave of inflation being temporary.

Well therein lies the bollocks. The way in which inflation is measured (primarily through the CPI) is smoke and mirrors. Inflation is largely represented through expansion of the money supply. I have yet to hear any meaningful opposition to that idea. The following 'Ultimate Guide to Inflation' by Lynn Alden is good.

Definitions: Three Types of Inflation
Broad Money Supply vs Consumer Price Inflation
How Accurate is the Consumer Price Index?
Transitory vs Non-Transitory Inflation
Who Benefits or is Harmed by Inflation?

According to the RBNZ our banks' collective balance sheets stood $630.135 billion for the period ending 31 Mar 2021 compared to $631.371 billion for the period ending 31 March 2020.

Graphic evidence US banks don't want to lend.

Where There's Mania


I hope the current wave of inflation accelerates and does not abate. Central banks are the enemy!


Tom - its feels like we've transitioned through something very strange the last 12-24 months. I used to also think the central banks of the world stood for something meaningful and for the greater good. But I now think otherwise and as you say, in many respects I view them as the enemy. Not just for me personally, but for younger people (say anyone under 30 that doesn't own a house). They are destroying and polarising society through short-term, limited thinking - yet they've backed themselves into such a corner that they have no other option but to continue doubling down on failing policies, until the system collapses completely. The rise of the likes of robinhood and wallstreet bets and cryptocurrencies show that people have had enough of the way the current financial system is governed and it wouldn't surprise me to see significant change into the future.

I might need to get me one of those George Gammon #EndTheFed hats.

Central banks are engaged in a vast reckless experiment that is already total failure. Then in their wake, observing what they do and their making up of their gameplan on the fly, here come the financial journalists and economists seeking to legitimise what the central bankers are doing. These people observe, and then state things like "when interest rates hit the zero bound, then central banks launch QE". That's what they've done, but this is ignoring the fact that sending interest rates to zero is the central banks own reckless act, and then launching QE is a reckless added step that we simply don't have the data on to see if it works. Sending rates to zero is already an extreme act that indicates central banks are prepared to go past a point that should be seen by a reasonable, rational person as a 'bridge too far'. The actions of central banks can be demonstrably seen to have massively distorted our economic system. Could central bankers not have envisaged this outcome? There are so many gaps in their thinking, gaps which are absolutely glaring! You can inflate asset bubbles to create a so called 'wealth effect', but how do you get back to normal? What is the exit strategy? How do these bubbles get 'normalised' and stop being stimulus supported outliers? How do markets get back to normal once they become reliant on stimulus? How do central banks start to unwind their balance sheets? I would love an economist or financial journalist to tell me, because so far they have produced absolutely nothing that details the exit strategy. This looks like an exercise in taking extreme actions, and then hoping things all work out. But hope is not a strategy.

As you say, a lot of holes have been exposed in the theory of how central banks should act.
One I've been thinking about is liquidity... It seems that the lesson learned from '08 is that the whole market can fall because of liquidity problems caused by a few players going down. So they've decided that liquidity should never be an issue ever again... But if liquidity is never an issue for even the most insolvent, no one ever goes bust or even faces short-term funding crunches that require some reserves... and you soon have a zombie economy where the only incentives are to use as much leverage as possible and speculate as wildly as possible.
Likewise, the 'responsible' notion of forward guidance. Central banks are now expected to telegraph even the mildest interest rate moves months in advance -- so any such move immediately gets priced in. We need the market to have some fear of central banks, they need to be a little irrational and threatening. As things stand the central banks are the plaything of the market.

Central banks are concerned with 'doing' to support, and less concerned with the consequences of their actions. Central bankers have in the past claimed that they cannot tell when something is a bubble. Economists talk about the superiority of 'mathematical modelling'. All of that should be deeply worrying to a thinking person. There should be learnings from past experiences of 'irrational exuberance' and speculative mania's. Since central banks such as The Fed were set up to ensure we avoid devastating market crashes, you would think that they would be students of past bubbles and what constituted a bubble, you'd think they would be looking to avoid bubbles like the plague - rather than quite deliberately inflating bubbles as they have done. There is something flawed there, these people are too much of the banker and mathematician - and also the gambler - and not enough of the psychologist and historian.

When you're going around lighting fires then showing up 5min later with the hoses to put the fire out, you know there is something very wrong with the individuals involved. Especially when they tell you they've got everything under control, while 2min later heading around the corner and lighting another fire! Nothing to see here folks....

... nailed it ! ... they think they have the solutions ... not realizing that the problems were created by them ... and that their next raft of new " solutions " just make everything worse ... worser than worse ...

Inflation was traditionally measured as the increase in the supply of money. Using this as a starting point:
Narrow money / M1, being currency held by the public and transaction deposits has increased 31% YoY to March 2021. Broad money, being M1 plus savings and term deposits, has increased 8.2% YoY. Rather annoyingly the RBNZ has re-branded these as C50 rather than the widely understood M1/M2/M3, which now refer to consumption and investment. But anyway... CPI is only 1.5% YoY. What gives! I think a low CPI is somewhat of a self-fulfilling prophecy as it is the price of a basket of goods adjusted for spending habits. I wonder what would happen to discretionary goods such as alcohol and tobacco, or electronics, as prices go up? Their proportion of spend is likely to go down, or people will substitute (LCD panels are dirt cheap nowadays - which is why you'll find a relatively large panel in just about every home). All this (and more i'm sure) hides what people 'feel' to be inflation and is probably why you hear so many people expressing that things 'feel' much more expensive than CPI would suggest.

What isn't captured is the inflation 'potential'. There is enough competition with food for example to keep prices relatively stable - they fluctuate according to supply against a relatively fixed demand ('price inelastic'). But say we have a supply interruption and our food supply is decimated. There'll be some price increases - but the supply of money has been increasing also so some of that supply will come away from inflating asset prices (and assets may be sold) and reallocated to paying what needs to be paid for such as food or some other essential. The fact CPI has been only running 1.5% doesn't mean anything now - the money supply has already been created, and at a much higher rate than CPI would suggest. So CPI gives us a false sense of security on top of inflating asset bubbles because 'there is little inflation' according to this flawed measure so borrow away and the RBNZ will make it cheap to do so!

Hi David, Liked : Clue- It involves houses

To get attention of

Very true when you say are actually trying to convince themselves and that in it self confirms that they are hoping aloud, whereas reality is otherwise.

"Central banks around the world are attempting to convince everybody (and themselves?) that the current pricing pressures we are seeing - largely as a result of supply chain disruptions due to Covid - will be temporary."

Reserve bank governor will keep moving the goal post. Now they know that it will be definitely be 2% so saying that are comfortable with 2% and if they feel will be 3 % or 4% will take their comforte level higher.

"Central banks around the world are attempting to convince everybody (and themselves?) that the current pricing pressures we are seeing - largely as a result of supply chain disruptions due to Covid - will be temporary."
All politician's lies and talks... The truth is, we have no control of our interest rate, it is in the hand of US federal reserve's hand. With Biden's trillions stimulation, you bet inflation is near. RBNZ and Orr are peeing their pants now. If they are brave enough to take responsibilities, they really should start slowly increasing the OCR right now and do not wait passively. The least thing you want is hiking the rate and crashing the market.

Lets look .... $1m mortgage + good deposit. interest rate would be $30.000 / year.
that $30.000 is just 6% of disposable income. and that income would be $500.000 (1% = $5000, 100%=$500.000 .....
Clearly the salaries moved on !

Maybe in 3 months once the transitional inflation is running wild. Wheel barrow prices are on the up.

I'm curious about how it would all unfold...
Consumer price inflation detected (or USA rates begin to rise) -> NZ raises its OCR finally -> 12-24 months later disposable income of mortgage holders actually begins to drop....

That lag is too long, surely investors would act first and sell down some properties, lowering house values a touch, which would me the main jolt well before disposable incomes change.

And meanwhile our creative governments have at least a year to figure out a way to catch the falling knife for us.

I don't see a problem, really. The government(s) of NZ are so creative with so many strings they think they can pull all in the name of causing the least measurable pain in the short term. Long term issues and the pain of non-property owners and the poors are easily ignored. Prices will stabilize and interest rates will be brought back down.

Who knows what the trigger will be but once the myth that the only direction for house prices is up, all bets will be off as to where they might fall.

There's enough evidence to draw on to demonstrate this - USA, Spain, Ireland, Japan, London to name a few - we are now sitting on eye-watering price levels.

Yip, I still haven't been convinced that we won't see a 50% or more housing crash in NZ. Its more likely now than its ever been in the past. Looking forward to P8 say BS, but then tell everyone that you also need to be open minded to all possibilities (but just not the ones you don't like personally!).

Could become the perfect storm - high debt, rising interest rates, companies with debt can't/don't default on debt obligations so are forced to pay higher interest rates and costs, no margin for wage increases for staff, severe stagflation (higher prices but no wage growth), mortgage owners are secondary to what is happening in the real economy (i.e. jobs and wages), mortgage payments rise, but wages do not, while wages are also being erroded by higher consumer prices for food, electricity, other utilities...

As I say, have a chat with your company CFO if you're corporate and ask about the debt structure and impacts on rising interest rates....will the pay the staff higher wages first to cover their rising personal mortgage costs and food/utilities....or will they pay the debt they owe on their bonds/preference share arrangements and to hell with the staffs personal issues surrounding inflation. I know which one I'm freezes so that debt can be paid to avoid insolvency.

It's so massive now the only politically palatable option is to keep digging that hole. Right now govt can borrow cheap. If they had any clues they'd be going balls in on infrastructure and social housing while It's cheap borrowing. Shame that won't happen.

Instead everyone gets dragged down with more tax policy in a depraved and ultimately fruitless effort to "lift" those at the bottom up. No, instead we'll see even more disconnect from reality, plus wait til they throw the borders open and people come flooding in.

Yes NZ is extremely expensive and a quite intensely boring place most of the time, a semi functional back-water at the bottom of the world... but guess what, safety trumps everything in life and love. Fear is more powerful than greed.

With over 7 billion in the world and growing people who can move here from overseas see NZ as safe and liveable in so many ways. The good peeps of this land will once again be sacrificed on the pyre of immigration. NZ was deeply undervalued in housing compared to other countries for many years. Ask any pom what they think... it's utter paradise to them.

Just have a look at Waiheke Isl if you want a snapshot of what NZ will become.

I'm an honorary pom and I have a lower opinion of NZ than I do the UK.

Im a Pom and a kiwi also and it’s hard to say which is the better place to live.

Like all things it depends on ones circumstances.

Im from UK. NZ was a paradise about ten years ago when I left after my first stint. I've come back to settle and found a slightly different place to my memory. Not necessarily all bad but when focusing on the negatives it feels harsher and less certain of itself. No chance you'd call a TV programme 'Fair Go' now. That as a kiwi concept is gone. BBQ conversations in NZ are definitely much more money/property obsessed than I ever had in London. You wouldn't think that would be right. Perhaps that's just what happens when an extra million of us dirty foreigners arrive in just ten years.

I’d probably rather live in the UK if I had the money. But it would be slim pickings to find a great house and lifestyle for £500k in the good parts.

I think the psychology of property owners here is such that they will eat a whole lot of sh*t before considering selling their properties. They'll be living at Mum's and renting out their previous homes... living on baked beans, on the credit card... taking the kids out of private school... anything, to avoid selling their properties. I think a very large number of us would rather live in poverty for years than accept that a bet on property could ever fail. That'll keep prices propped up somewhat.


As I have been saying all along since February last year, the ultra-loose and criminally reckless monetary policies of the RBNZ will prove disastrous.
Orr has created a gigantic housing bubble and even further unbalanced the NZ economy towards unproductive and parasitic housing speculation. In doing so, he has compromised the financial stability of NZ, breaching one of the most important items of this mandate.
He must go now, and his replacement must immediately reverse the current irresponsible and reckless stance. Better slowly and progressively increase interest rates now, than being forced later on to increase rates to a much higher level in order to fight surging inflation.


The whole RBNZ needs to be swept clean. All incumbants are tarnished accomplices. What they have done has caused serious societal degradation.

Yip the reserve bank is as independent as a race horse owner at the TAB.

'$1,000,000 on the housing market for the win thanks...oh and make it a trifecta will you with shares and bond prices to place please'.

Right back to the office team and to drop the interest rates before the FHB's have turned 18 and can save a deposit, then we can cash in our winnings!


They will drag their feet on raising rates.

They will consult and delay and dither while inflation runs rampant.

Nothing will be permitted to threaten their asset bubble.

They can always just say their primary remit is financial stability, raising interest rates now would threaten that. Or fiddle with how CPI is calculated some more so they can pretend inflation is low.

I'm sure they have every excuse under the sun lined up.

It's not going to save the housing market when global rates are raised.

This country is deluded.

I've found you need to talk to people who have lived overseas through a property bubble otherwise yes as you say, you're talking to a lot of very deluded and naive people here in NZ. I find it weird and at times incredibly frustraiting. But when a person (or a group of people/sheeples) is/are conditioned to only think in one way, then do you get angry at them or feel a bit sorry for them?

Delusion is great when you can't see the disaster (potentially) approaching. It arrives and you're still in a state of bliss and its not until after the event that you are aware of the danger. That describes a large proportion of NZ'ers (from my perspective having lived through the GFC in the US).

They shouldn't worry themselves - the reserve bank will save those with too much debt each and every recession in the future (yeah right!)


All I can say is that it was a mistake moving back to New Zealand.

This country is a never-ending clown show.

The exodus will begin very soon!

But the narrative is 'buy now before all the kiwis come flooding back home from overseas and immigration starts again'.

A number of young people I've talked to recently have had it with NZ (the last 20% + increase in housing was the final straw) and will be leaving when they can.


I lasted 6 months and will probably never move back to NZ even though I once loved it. It has changed so much and the hatred the rich have for the poor was shocking. The facebook landlords page literally made me feel sick. When did kiwis become so mean and cruel to fellow kiwis? Wheres the empathy gone?

I would have to agree with that comment about landlords. I do building work and have met many. Most are quick to denigrate their customers. Its hard not to think of them as a greed class .

Yip I've also noted a strong correlation between property investors and narcissistic personality disorder. You even see it in the comments on this site, let alone the insanity on the FB investor pages.

Here are the signs to look out for:

It's the self importance, sense of grandiosity, sense of entitlement (to more wealth), and lack of empathy (to other people less fortunate) that is really concerning. And it grows in proportion with the bubble! Although I've noted a few more people in the last 12 months post lockdown who can now see how unsustainable the situation is becoming and wondering why one group is getting rich (property investors) and another group is being punished (those now needing welfare and others having to pay the taxes for their care.....that goes to property investors!)

Nobody with a clue is going to be flooding back here in a hurry.


NZ seems to be a country where you want to be one of two things.

1. A property investor paying no tax and getting rich from capital gains for doing nothing

2. A welfare bum who gets paid to sit around and do nothing and receiving taxes from other people.

If you actually generate income and paying taxes here your likely doing a lot of the heavy lifting for the country but not being rewarded for your efforts. Yet that is the only way to actually improve the living standards of a country....but at present you are punished for doing that (what silly incentives we have in place).

I actually agree with you.


Indeed, I very much encourage young people to leave, NZ is simply not for young people anymore, you will be saddled with huge tax costs, impossible to access housing limiting your ability to have a happy life and a government who actively works against your future interests. This one just does it while they are saying they are doing the opposite.


They claimed financial stability by REMOVING the LVRs! Those very same LVRs that were put in to ENSURE FINANCIAL STABILITY.

Utter stupidity that I bought up on here, I hope everyone emailed the finance minister about it at the time. Brock and fortunr are correct, it's a clown show at the RBNZ with the finance minister hopelessly out of touch/depth. If only we had competent people pulling the levers, we wouldn't find ourselves in such a dilemma. They have painted themselves into a tighter and tighter corner on spurious, often duplicitous or in the least incompetent reasoning. They appear to be intentionally taking the NZ financial system down, one must wonder why they are allowed to do so.

Yip, a forecast/potential fall of 10% in the housing market (as expected this time last year) requires emergency intervention....but a 20-25% increase, when prices are already at extreme DTI ratios is no problem...lets just wait and see! How #%##'ed.

This history books on this period of time are going to be talked about for decades if not centuries. The COVID crisis and housing bubble insanity. Be like the way people remember 1929 a hundred years later. Just a different asset class - or actually more likely both or all asset classes....rising rates will decimate everything (property, shares (with a few exceptions) and bonds).

175% of disposable income. And that's will low interest rates, employment propped up with covid cheques and massive house construction which surely must soon exceed demand (at prices being offered).

The problem with predicting a boom or a bust is the matter of intervention. A world awash with debt is a world awash with cash. When you borrow $1 million for that brick unit in Auckland, the previous owner becomes cash rich. One result of lots of easy money could be inflation, unless other deflationary forces are at play. What happened to the Covid 19 doom and gloom scenarios? Easy money made them go away. If the interveners decide to crash the system, then the interest rates will rise!

So high OCR with high debt?

I saw another graph today that appears to come from the BNZ that wouldn't look helpful beside the above.
It looks forward 4 years and sees savings vs disposable income dropping 2% year on year.
No idea why, inflation?

Chinese population growth has ended and will now start to decline. This means expansion of Chinese manufacturing that has exemplified the last 25 years is no longer achievable at low cost. There are no more millions of peasant farmers wanting to migrate to the cities and work at low wages. To expand Chinese production from now on requires greater technology investment.

The world is going to have inflation in the medium term. If we have low interest rates we are going to have lots of inflation. If we have high interest rates we are going to have less.

If we have low interest rates we are going to have lots of inflation. If we have high interest rates we are going to have less.

If we have low interest rates we are going to have lots of inflation or put a floor under assets prices. If we have high interest rates we are going to have less inflation or dare we say a deflationary bust. The 1920's boom times were fun, the following depression not so good. That depression was avoidable.

Puts me in mind of that thing George Soros writes about: Reflexivity. Reserve Banks and Governments, intentionally or not, keep intervening to stop price discovery in the asset market. Consequently it's been stuck in a positive feedback loop for many years with increasingly extreme action required to keep it there.

A 7% or even a 5% rate would have a brief life before the economy was plunged into a deep recession and interest rates followed.

Unlikely. NZ are a pimple on the backside of the international financial elephant. We'll have very little control over whatever is happening with rates globally. And who's going to buy municipal bonds at -1% off the RBNZ when other governments are offering much larger tranches at 3+%?

seems to be becoming an off topic moanfest by expats and offshore.cant believe that anybody that doesnt live here anymore would find it important to register just to trash talk nz.

One of the big banks seems to be stress testing peoples ability to pay at a 5.8% mortgage rate. This seems really low. I would have thought 8% is more conservative.

Hope the the RB were watching the Berkshire Hathaway meeting and were listening to what Warren and Charlie said.

Yes, lets all hope that central banks are "right about inflation"! Why would they not be right? They are professionals who are responsible to......wait a minute, they aren't responsible to anyone! So in reality, whatever the general public might wish to believe about their "professionalism", they can literally (and autonomously) say whatever they like and they have given themselves license to do whatever they please.
Why would you believe the sky is pink when you can see that it's blue?