The head of one of the country's largest mortgage brokers has written an open letter to Reserve Bank (RBNZ) Governor Adrian Orr urging him to hold fire and NOT hike the Official Cash Rate (OCR) again.
The RBNZ's widely expected to increase the OCR again on Wednesday by at least 25 basis points to 5.5%. Economists reckon there's even a chance it might be a 50 point hike.
But David Cunningham, CEO of mortgage broker Squirrel, and a former CEO of The Co-operative Bank, is warning that "households are in for a WORLD OF PAIN". Cunningham has previously strongly expressed an opinion that the OCR should not go up again this week.
But now he's gone further with a lengthy letter to the RBNZ Governor in which he says that raising the OCR further "is the last thing the Reserve Bank should do right now".
He says the average mortgage rate Kiwis are paying today is 4.40% - up from a low of 3.20% just over a year ago.
"A lot of households have only managed to make up that added cost thanks to repayment buffers they’d built up whilst interest rates were low.," he says.
"Now, even if the OCR is held at current levels, the average mortgage rate Kiwi are paying is going to rise to 5.90% over the next year, as more people roll off lower fixed mortgage rates to higher levels. That’s another 1.50% to find on top of where we are now, and with repayment buffers much narrower.
"Households are in for a WORLD OF PAIN. In short, monetary policy is on a steep tightening cycle for another year. Kiwi don’t need the screws tightened further via more interest rates hikes. Kiwi need someone to cut them a break."
Cunningham makes arguments that migration actually helps the RBNZ's inflation fight, while last week's Budget "is actually good news" for inflation.
"In short, my view is that the surge in migrants will see unemployment rise – but it won’t take Kiwi losing jobs (as was the Reserve Bank’s original plan). Rather it’ll happen as a result of a bigger labour supply, which will be a drag on inflation," Cunningham says.
On the Budget, Cunningham points out that according to Treasury forecasts, inflation has already begun moderating and will fall to 4.5% by the end of 2023 be back inside the RBNZ's target band of 1%-3% inflation by late-2024.
He says that while some might argue there’s cause for concern in the fact that wholesale interest rates have shifted upwards over the last week – perhaps suggesting that inflation isn’t quite under control yet – "in my opinion that shift is inconsistent with underlying economic factors".
"In fact, I’d suggest the rises are being driven by financial markets participants. After all, who benefits most from financial market volatility, if not the financial market traders?
"What would I do? I’d hold the OCR at 5.25%, but make it clear that this rate is unlikely to be lowered during 2023. That will ensure the tightening monetary conditions for households are delivered, and see wholesale interest rates revert to the level they were after the April OCR review.
"PATIENCE is what’s needed here – and I know the Reserve Bank has it in spades. I believe it’s now time for you to watch, worry and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door.
"Governor Orr: Don’t kill the economy, and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster."
145 Comments
Absolutely, if anyone should bear the brunt of central bank inaction and government largesse, it's the small portion of recent home buyers with larger-than-average mortgages. Their fault for not being born earlier, I say. If they wanted to get ahead, they should have moved overseas and had their families there!
"If they wanted to get ahead, they should have moved overseas and had their families there!"
That is what many people were suggesting on here - so not sure if this is satire or a serious comment, or something else?
Are you implying that this advice, was actually good advice, but was ridiculed by vested interests at the time?
(and look I understand how ridiculous this whole situation is (young people should be able to live near family and buy a house) - but we should have never allowed this situation to get this bad in the first place with prices so far detached from incomes - and that needed to start with limiting FOMO and speculative mania - which I was attempting to do on this site - but received a lot of shit for doing so by vested interests - i.e. people who were trying to make money by risking other peoples financial futures).
I know of a 29yr old female, single, has 2 jobs and has 2 houses.
Look at some of the immigrants who have settled in NZ in the last 15 years, they own dairies, liquor outlets and restaurants.
It's easy to sit around and complain and wait for more government handouts.
Unfortunately, there will be some borrowers who are under cashflow stress, and also likely to be under mental stress.
Some borrowers may never financially recover and the financial loss will affect others in those households (spouse, children). Some may need to turn to social housing.
Losing one's entire lifetime of savings will also cause mental stress and unfortunately, some will turn to self harm.
Here are some examples of other countries where owner occupiers were buying a house for their families who got caught up as collateral damage:
1) Ireland -
2) US - 10 years after the boom -
https://youtu.be/iKPG_l1P7lk
Part 2 - https://youtu.be/ugBKnP2FKDM
House prices around the world that took a long time to recover to previous peak prices (if at all)
i) Japan - peaked in 1991 - still not recovered by 2022 https://fred.stlouisfed.org/series/QJPN628BIS
ii) Bulgaria - peaked in 2008 - still not recovered in 2022. https://tradingeconomics.com/bulgaria/housing-index
iii) Croatia - peaked in 2008, recovered 12 years later in 2020 https://tradingeconomics.com/croatia/housing-index
iv) Cyprus - peaked in 2008 - still not recovered in 2022 https://tradingeconomics.com/cyprus/housing-index
v) Denmark - peaked in 2008, recovered in 2017 - 9 years later https://tradingeconomics.com/denmark/housing-index
vi) Estonia - peaked in 2008, recovered in 2017 / 2018 https://tradingeconomics.com/estonia/housing-index
vii) Euro area - peaked in 2008 - recovered in 2017/2018 https://tradingeconomics.com/euro-area/housing-index
viii) France - peaked in 2012 - recovered in 2018 https://tradingeconomics.com/france/housing-index
ix) Greece - peaked in 2009 - still way below in 2022 https://tradingeconomics.com/greece/housing-index
x) Hungary - peaked in 2008 - recovered in 2014 https://tradingeconomics.com/hungary/housing-index
xi) Iceland - peaked in 2008 - recovered by 2013 https://tradingeconomics.com/iceland/housing-index
xii) Ireland - peaked in 2007 - still not yet fully recovered by 2022 https://tradingeconomics.com/ireland/housing-index
xiii) Italy - peaked in 2011 - still under water in 2022 https://tradingeconomics.com/italy/housing-index
xiv) Latvia - peaked in 2008 - recovered 12 years later in 2020 https://tradingeconomics.com/latvia/housing-index
xv) Lithuania - peaked in 2008 - recovered in 2019 https://tradingeconomics.com/lithuania/housing-index
xvi) Macedonia - peaked in 2009 - recovered in 2021 https://tradingeconomics.com/macedonia/housing-index
xvii) Montenegro - peaked in 2009 - still below peak in 2022 https://tradingeconomics.com/montenegro/housing-index
xviii) Netherlands - peaked in 2008 - recovered by 2018 https://tradingeconomics.com/netherlands/housing-index
xix) Poland - peaked in 2011 - recovered by 2017 https://tradingeconomics.com/poland/housing-index
xx) Portugal - peaked in 2011 - recovered by 2017 https://tradingeconomics.com/portugal/housing-index
xxi) Romania - peaked in 2009 - recovered in 2021 https://tradingeconomics.com/romania/housing-index
xxii) Slovakia - peaked in 2008 - recovered in 2018 https://tradingeconomics.com/slovakia/housing-index
xxiii) Slovenia - peaked in 2008 - recovered in 2019 https://tradingeconomics.com/slovenia/housing-index
xxiv) Spain - peaked in 2008 - still not recovered by 2022 https://tradingeconomics.com/spain/housing-index
xxv) Switzerland - peaked in 1990 - recovered 20 years later by 2010 https://tradingeconomics.com/switzerland/housing-index
xxvi) United Kingdom - peaked in 2008 - recovered by 2015 https://tradingeconomics.com/united-kingdom/housing-index
xxvii) United Kingdom - look at 1990 - 1999 period
xxviii) Hong Kong - 1998 peak to recovery in 2011 https://tradingeconomics.com/hong-kong/housing-index
xxix) Singapore - peak in 1997 and recovered by 2010 https://tradingeconomics.com/singapore/housing-index
xxx) South Korea - 1990 peak and recovery in 2002 https://tradingeconomics.com/south-korea/housing-index
xxxi) United States - peaked in 2007 - recovery by 2017 https://tradingeconomics.com/united-states/housing-index
Remember during covid when Labour and many Kiwi's were taking pride in the fact that our death rates from covid were less than many other countries. That was celebrated, despite the significant economic effects.
Why were people so happy to be different from the rest of the world with covid, but with inflation and housing seem to love making the point that we are just like everyone else?
It is even worse when you realise that much of the pain people are in now is a direct result of Labour being different to the rest of the world with its covid response... if we just got on with it like everyone else the problem would be half the size it is now.
So yes, there are many examples of house prices going tits up. There were also many examples of covid deaths being far, far higher than NZ's. You want me to list those? Will go far beyond xxxi.
Probably steering clear as he spent months publicly lobbying against the CCCFA. Imagine how hypocritical he would look, after demanding home loans be exempt from CCCFA (as it was only meant to apply to "shop trucks and predatory lenders") only to then publicly beg the RBNZ not to raise the OCR as lots of their pre-CCCFA home loans are now facing financial stress.
Don't forget a lot of the reason mortgage brokers were so against the CCCFA is much of their business model was helping customers maximize their lending. They understood how banks lending calculations work, so they would help borrowers "massage" the figures they provide for outgoing expenses to secure the most borrowing possible. And it will be those same people who are now in financial hardship.
Go look at Squirrels products like "Launchpad" loans so you need a 5% deposit, borrow 15% at 10.5% and the remaining 80% at 8.29%p.a on interest only terms. I'm sure they were offering something similar when rates were at record lows - how do you think those borrowers are doing now?
Squirrel aren't worried about borrowers, they are worried about their sub-prime lending business going belly up. Anyone who put deposits with them (earning 5% oncall) needs their head examined.
I wonder if ANZ's $250mln fund raising might be to 'manage' the fallout from numerous lawsuits or a class action against the banks for their scurrilous lending using woefully inadequate test rates and in some situations no test rates at all? It seems to me a good case could be made in many situations.
I am not going to comment on mortgage brokers.
CCCFA was so badly drafted it created a credit crunch over night, I would have preferred it was well drafted for the welfare of clients that got caught in so many messy situation's since. Only vested interest is less work and less stupid fees on clients as a CA.
Inflation, in itself, has made the click bait title valid enough.
Miguel, you tell a good story sure to yield you many upticks, never mind that J Bolton just released a video with his views (so not "remaining silent") where he says he expects the RBNZ to raise 0.25% this week.
I didn’t say he wasn’t speaking in public, my point was that he has clearly chosen not to get involved in attempting to publicly lobby the RBNZ to stop raising rates, and has left that to a colleague.
Im not going to watch that video as I’m certain he is not saying he thinks the RBNZ should raise rates by 25. Instead he will be saying he believes that is what the RBNZ will do, saying anything else would make him look foolish within 24 hours. So it doest contradict my point at all
I've heard enough of John Boltons opinions to know what he'd be saying to know watching the video won't provide me any new information.
If you are telling me that during that video he says he thinks the RBNZ should raise rates, ill be happy to stand corrected.
But he didn't did he? Or you would have already pointed that out.
Go look at Squirrels products like "Launchpad" loans so you need a 5% deposit, borrow 15% at 10.5% and the remaining 80% at 8.29%p.a on interest only terms. I'm sure they were offering something similar when rates were at record lows - how do you think those borrowers are doing now?
Good heavens
JC: "Where's Squirrel Bolton these days?"
He's here JC, and yo will be surprised that he's expecting a 0.25% rise by the BNZ this week
Cheers Dr Y. Looks like Squirrel has picked up on the wealth effect dynamic...a little. But overall, a predictable narrative. Still very much got that Kiwi banker vibe about him. He refers to the ol' "houses have fallen 30% in real terms" trick. Houses are not priced in "real terms". It's a silly way to think, particularly with uber bubbles.
Should get his hair seen to as well.
Pretty amazing coincidence, those two posts.
Reminds me of how Elon Musk rooted out some Telsa company leakers recently. They sent out another tasty internal memo, but each person got a slightly different version, varying by little typos like an extra space or a missing comma. The sleuths recorded the variant sent to each recipient, then monitored social media for leaks. Sure enough, juicy parts popped up in public, dutifully copied, including typos. Imagine the horror of the leakers being unexpectedly invited to an ominous sounding meeting, to find waiting for them a sloshed-off looking manager and a beefy guy with an empty cardboard box to show them out of the building.
I don't recall these guys complaining when they were selling mortgages to every person they could, regardless of how credit worthy they were if interest rates were to eventually moderate. This is why many on here were cautioning people and fighting against the spruiker FOMO/narrative - and being told that we were 'doom gloom merchants'.
There is a popular internet meme that comes to mind.
https://th.bing.com/th/id/OIP.OWUGEd8pfNXUxTKaExScoQAAAA?pid=ImgDet&rs=1
I think it's worse than that. The "households are in for a WORLD OF PAIN" are the ones he helped get mortgages. The ones that got their advice and reassurance from his company. The ones that got advised on how to arrange their expenses so they could get the loan.
He has massive confits on interest with his own guilt and possibly personal safety. Of course new lending must also be dropping of a cliff as well.
Lenders are in general highly intelligent motivated by making as much money as possible.
Borrowers are a cross section of people who on average want to feed their family and put a roof over their heads. Most will not read paragraph 5 subsection 3, where they have to sign in blood. Most will follow advice.
Vested interests include mortgage brokers. They took the super comission's as sales and price surged when interest rates fell thru the floor. Well the pendulum of debt cost is swinging back towards normal.It's all good, they will have listened to Mr Orr and will have saved some of the last five years windfall. Saved, and not overshot on a bigger house, rental properties structured to rinse income tax, or a flash euro car.....
Surely not....
The unconscious bias in these issues is quite amazing (low interest rates, high house prices = good. Rising interest rates, falling house prices = bad).
I mean there was nearly zero chatter from these guys when interest rates were falling in the way that they were GFC - 2021 because business was too good for them - i.e. they were deluded by greed when the going was good for them. As opposed to saying to people - 'hey be careful everyone, rates might go up so don't load up with debt!'
Now business is slowing down because of rising rates - now they want to complain.
The way I was raised was to act with prudence and avoid greed. This prevents these types of issues happening. If you get greedy, you get burnt. Why would Orr listen to these guys now when he was warning them for a number of years that this could happen?
Exactly, squirrel inadvertently sent out an incomplete email to me that had John Boltons predictions of last year (not his current predictions as the email was intended for) that the OCR would only get to 3% and that after a 10% drop in house price falls they would stabilize. How wrong was he and he now expects us to listen to his new predictions? Vested interests are rife when those commissions dry up
Root-cause analysis would suggest mortgage brokers were just meat in the sandwich.
The real problem is we had a Reserve Bank going from normal interests rates - to near zero - and now with the promise of the highest interest rates since just before the GFC - in less than 4 years! Correct me if I'm wrong, but this level of change is unprecedented.
Let's not forget, the primary purpose of the RBNZ is to provide financial stability. Have they done this? F'ck NO! They have destabilized the economy and are ruining the lives of a whole generation.
What did you think was going to happen when interest rates were set too low for too long?
With house prices rising for decades at 7% while general inflation (and wages) limited to 2% growth? All this did was force mortgage rates down and resulted in the extension of far too much housing debt relative to our GDP.
Could you not see this was a recipe for disaster - or is it only just becoming apparent now that we pay the piper? I was told I was a doom goblin for warning about this outcome - that people could be seriously hurt. But apparently only people with bad attitudes discuss this type of risk.
IO, Could you re-read my post again. We are in fact on the same page. My post above is in response to the suggestion that brokers are equally culpable.
To re-iterate - what has happened is exactly what I predicted would happen. And the suggestion by the RBNZ that the OCR could go negative is the biggest croc of sh.t I've ever heard. The RBNZ was at fault in dropping rates to near zero when the Government of NZ was doing all that was necessary to keep things ticking along. There was never any need go as low as the RBNZ did. In fact, I believe they could have dropped 0.5% as a "good will" gesture and that would have been plenty!
The RBNZ was at fault in dropping rates to near zero when the Government of NZ was doing all that was necessary to keep things ticking along. There was never any need go as low as the RBNZ did. In fact, I believe they could have dropped 0.5% as a "good will" gesture and that would have been plenty!
That's recency bias. You need to stretch back 10, 20, even 30 years if you want to be a hardcore DGM.
Could you not see this was a recipe for disaster - or is it only just becoming apparent now that we pay the piper? I was told I was a doom goblin for warning about this outcome - that people could be seriously hurt. But apparently only people with bad attitudes discuss this type of risk.
I can side with your sentiment IO. The water cooler consensus has always been 'she'll be right'. And the central bank, govt, and media have been hammering home how exceptional we are. So you can understand where the flock is mentally positioned.
IO, with regards the observation "house prices rising for decades at 7%" ... I've posted on this subject before and have quoted the Infrastructure Council's view on why. In a nutshell - It was local councils restricting land supply with their daft zoning rules. Thankfully, NZ central government - using root cause analysis - has remedied this issue to quite large extent with the MDRS and the NPS-UD. The best property investors can hope for now will be rises at the rate of inflation. Probably for 20-30 years.
To address financial stability risks, central banks need the effective tools.
Monetary policy is not the tool to address macro-prudential risks (monetary policy tools are tools to address the RBNZ's inflation and employment remit)
The extreme house price risks were preventable back in 2016 when the then Finance Minister did not give the RBNZ the tools they requested to address macroprudential risks.
RBNZ's DTI plans hit by Government changes | interest.co.nz
If a debt to income ratio of 5 was imposed back in 2017, then a significant amount of lending would not have been made (and house prices would have been less likely to have reached their record levels).
Based on RBNZ data, the lending commitments made by banks in 2021, that were on a debt to income of 5 or above were NZ$58.8bn (about 59% of total lending commitments made in 2021). For the period of 2019-2022, total loan commitments on a debt to income of 5 or above totalled NZ$99.8bn (about 32% of the total loan commitments for that period)
https://www.rbnz.govt.nz/.../residential-mortgage-lending...
The higher the debt to income ratio for a borrower, then the higher the probability of default.
Now how many of these borrowers will experience significant cashflow stress, or default?
For some mortgages, the banks will allow some mortgage modification (such as extension of loan maturity date, or allow the borrower to go on interest only)
For other mortgages, the banks may require the borrower to sell the property. This will a key factor in determining the magnitude of house price falls.
Remember, that unemployment is currently low. What will happen when unemployment rises? How many more borrowers will be under cashflow stress?
Not so.
The RBNZ's own forecasts said the OCR would move up slowly from 0.25% and most bank economists were predicting with significant certainty that even now the OCR would be around pre-COVID levels, i.e. 3.0% to 3.5%.
Case in point: https://www.interest.co.nz/sites/default/files/2021-11/wesocr.png
Bank economists are paid to say one thing publicly and another thing internally. However, what they say publicly can be used against the bank at a later time. I'd be enormously surprised if what is happening now wasn't taken as a likely outcome and they prepared for it.
I have no lessons to learn IO. Well, at least not at this level. Been in and around banking for many years.
'I'd be enormously surprised if what is happening now wasn't taken as a likely outcome and they prepared for it'
Orr provided plenty warnings if you listened closely enough.
I would have thought you would have far less trust in the banking system and the narratives it tries to paint (vs what is really happening) if you've had such involvement with them.
Then again, it was the same during the GFC in the US when I was there. The bankers all acted surprised when the system went kaput - why? Because they were paid to be ignorant to the inherent risks they were taking/complicit in creating.
re ... Orr provided plenty warnings if you listened closely enough ... Agreed. He did towards the end. Where he failed was at the outset - he had no rules in place to stop the banks. I'd also add that as a public servant he should have been crystal clear. Nobody should have to read between the lines. Yet another failure?
re ... The bankers all acted surprised when the system went kaput ... You mean the CEOs pretended to be surprised. In fact, their number crunchers, economists, etc. and were quite vocal about the risks and the likely outcome - internally. Even Buffet knew the risks and was publicly quite vocal. But while a bank is creaming it in the CEO will squashed all nay-sayers. Keep nay-saying and you'll be out the door. Yes. I know how banks function.
Borrowers get what they deserve, they should have known interest rates wouldn't stay low forever. At the very least these young overleveraged mortgagors should pen a letter to their bank apologizing for the added risk they've incurred.
The banks were forced to test their loan serviceability at such low rates, it's on the borrowers for being approved and proceeding to participate in the greedy pursuit of home ownership instead of renting for the rest of their lives like good little serfs.
I'm a little disappointed that Interest has given this man more opportunity than he deserves to push a commercial agenda. I'd expect to see this in One Roof - it could sit there oozing its own vested interest with the other articles trying to pump up the tyres of the property market.
"Please Mr Orr, save my executive salary (cough) err... I mean company and shareholder profits, businesses need a break!"
People take risks when they invest and they carry this by means of agreeing to invest. It ain;t all sunshine and rainbows, know when to fold em
When 1 year mortgage interest rates were in the range of 2-3% p.a, how many highly leveraged borrowers thought it was even plausible that 1 year mortgage interest rates could get to 6.75%?
The lenders in their mortgage interest stress test rates were using a 5.8% p.a. Current mortgage interest rates are now above those stress test interest rate levels.
The rapid rise in mortgage interest rates is going to potentially catch those borrowers who borrowed at high debt to income ratios.
So the key question is how many highly leveraged borrowers will be unable to hold on?
More importantly, how many will be barely able to hold on by making deep cuts on their discretionary spending? We brought in more than half a million people in the last decade mostly to prop up the domestic economy.
I read a good take on the recent high net migration fiasco in Aus and NZ this morning. This trend puts our economies in a "uniquely terrible" position as it keeps adding fuel to the inflation fire, keeping interest rates stay higher for longer, which in turn ensures purchasing power of the average consumer remains subdued.
Even the banks didn't know interest rates could get to 6.75%. Which is why they were using long term test rates of 5.8% only 12 months or so ago.
Any reason why the banks didn't know? They're the ones that set the retail mortgage rates. Maybe if they lent a little more of their own money and a little less of what they don't have, they'd be less exposed to the fickle nature of their current funding model.
When 1 year mortgage interest rates were in the range of 2-3% p.a, how many highly leveraged borrowers thought it was even plausible that 1 year mortgage interest rates could get to 6.75%?
For the record.
Here is what John Bolton was saying about mortgage interest rates when the 2 year interest rate was 2.49% in July 2021. He wasn't expecting interest rates to hit 4.5%.
"What’s too high for a mortgage rate?
It depends on your view of how much rates need to increase. I don’t think long term fixed rates over 3.00% look attractive if I can still fix for 2 years at 2.49%. To take a 5-year fixed rate at 3.50%, the break-even would be fixing again in 2 years at about 4.50%. I just don’t see that."
https://www.squirrel.co.nz/blogs/housing-market/mortgage-rates-on-the-r…
I think he is right. But I think he is right they are now overtightening.
Remember the lag that the RBNZ doesn't think exists between something being reported and them acting. Inflation which is now dropping quite quickly despite half the commentators here saying it was going to be 7-8%. Loans are rolling over onto higher rates, spending is shrinking.
RBNZ - IT'S WORKING. No need to go overboard and keep raising, inflation is dropping like a stone (annualised now at 4.4%) and in doing so, you are going to do immense damage the other way. You shouldn't have dropped rates so low so quickly for no reason. You should also not raise rates so quickly simply because reporting/effects are delayed.
The fact they don't get this shows you how dumb they really are. Almost guaranteed they will raise rates and create a massive depression for no reason.
Overtightening wont cause a massive depression. It will simply cause pain to those bet against interest rates rising and house prices falling. Which is actually a small subset of the population compared with those who are struggling with inflation .. people with high rents and low wages - and those high rents have been caused by over priced houses by those who leveraged up and kept buying and lending when prices were already overcooked.
Exactly, the over leveraged are indeed a small part of the population. I for one am sick of them extorting everyone through inflation as they have bet "all in" on excessive leveraged realestate. Let them be crushed by the debt laden weight of their own greed.
Stay the course and then insert DTI to avoid a repeat of this stupidity.
"the over leveraged are indeed a small part of the population"
It would be interesting to see an update of this statistic from May 2018:
Just 8 per cent of households owe 40 per cent of the entire mortgage debt of New Zealand banks.
https://www.stuff.co.nz/business/money/104323467/reserve-bank-says-8-pe…
OSE, I'm surprised you don't understand that the extra interest cost affect everyone with a mortgage or finance (cars, big ticket items etc…) All these people will tighten their belts, which will result in a lot less money being spent, it just takes time… The recession is coming and it won't be a small one, but it will be caused by the over tightening of the RBNZ.
(re-read this comment in 1 year)
Fantastical thinking. Modern economies in general run on debt, driven much by monetary policy. Debt priced at a sensible level to enable businesses to buy new things, to enable expansion, to enable people to purchase land/houses by borrowing from their future. By raising rates too much, this all dies. Then the only option is saving up for something entirely and purchasing it once you have enough money in the bank, which would rely on a financial system under pressure from a lack of activity. That means no new milk sheds, no new plants, no upgrading of plants/equipment etc for quite some time. That's a depression because monetary circulation basically stops, everyone is saving, nobody is spending. Then all hospitality businesses start dying in massive numbers (already quite a few in Wellington), shops close up, government income dries up, government spending stops, unemployment surges and our dollar drops away to nothing making imports like oil hugely expensive.
Overtightening can easily cause a doom loop which we would struggle to recover from. Think 1920's America but with a much less diversified economy or ability to pull ourselves out of it. We could easily drop out of first class nations and become an agrarian subsistence economy with high crime, underfunded health care and limited natural resources to rely on. Believing there are no effects to overtightening is really, really dumb.
◉ US Treasury credit default swaps are the highest we've ever seen ◉ Nasdaq call volume is the highest in 8 yrs ◉ Bank deposits & M2 money supply are experiencing the most severe drop since 1929 A sudden reversal in these could trigger the greatest market correction in 90 yrs
Charts here:
https://twitter.com/FinanceLancelot/status/1659997833280335872?s=20
Don't we all remember reading what happened ~40 years ago when exactly the same situation was happening? "Inflation is dropping! Look! No need to tighten any further, in fact we need to drop rates back, so we don't strangle the nascent recovery" and so we did. But Inflation didn't play it's allotted part, and before we knew it, it had rocketed away.
Then Paul Volker did his thing. Do we really want to risk that again?
If the RBNZ are wrong by continued tightening, then dropping the OCR is the easy bit. But if they are wrong in the other direction, then pain will be an understatement.
(Isn't that why we are here? Arguably 'they got it wrong' by dropping the OCR so far, and correcting that mistake, hurts)
Agree. The problem now will be how Labour reacted to Orrs request for restraint in the budget to help constrain inflation. Orr has 4 years left on his very big contract and wont want to be remembered for letting inflation run riot
I suspect he will fire a hefty a warning shot for robertson and Hipkins to stop them doing anything else inflationary pre the election.
Quite.
Orr would probably have left the OCR where it was, pre-budget or if the budget had been remotely reserved.
Robertson however has given him no choice but to hike rates some more - both to cover the spending AND to send the message that this is the consequence such decisions.
Higher govt spending in such a highly inflationary environment is reckless and stokes inflationary risks directly affecting the stability of the economy - Orr simply has no other option than to respond with the only ammunition he has - and respond he will.
Cunningham is right.
He should, however, separate Kiwis into two groups. 1) Kiwis with larger mortgages, i.e. those that bought in the last 5-10 years, and 2) Kiwis without mortgages or very small mortgages.
The former are those who are in a world of pain and they're typically younger and have young families.
The latter are older and wealthier and they're most likely to be the ones contributing most to inflation as they're largely unaffected by increases in mortgage rates. They are also the group who are most likely to be "property investors" and can sell up and pocket their considerable un-taxed capital gains. Others will have term deposits and will be getting richer.
If Orr can not see the damage he and the MPC are doing to a small subsection of NZ's society he and the rest of the MPC should resign forthwith. The OCR is a stupid tool being used wrongly by stupid people.
Yip - if the principles of finance apply, then the higher our debt is relative to incomes, then the higher the risk and the higher the risk, the higher is the risk premium required.
So the last 10 - 20 years have been mad because we have been dropping risk premiums for mortgage lending, when we should have been raising them.
I mean if you were to lend somebody now $700,000 to buy the 'average' NZ home - what return would you want for that, for the amount of risk you are taking giving them that lending?
I'd say that because prices dropped 15% last year in real estate, what would be an appropriate risk premium for that lending? It would be much much higher than current rates.
Ask people in Turkey, low official OCR rates and inflation running at like 80%. I think bank rates are at like 50% or something crazy. Serious issues over there. People being told the quake rebuild will take a year, they will not have even finished demolition after a year, hell look at our effort in Christchurch. All this and they will be putting Erdogan back in again.
Actually, far less of those are FHB rather than OO who traded up or Specuvestor who saw $$$ signs.
Yes, some young families will be affected (I even know some selling right now), but there are OO out there who are sweating bullets, and investors where we are going to see carnage unfold.
Both groups far outnumbered the young families in the high DTI ratios (though some affected may be not-so-young families).
So if a mortgage broker's client defaults on their mortgage, does that mean that the trailing commissions to the mortgage broker cease?
1) fall in revenues
2) fixed costs - rent, support staff
Potential job cuts?
Employees who lose their jobs, with high levels of debt (owner occupier debt) and a negative cashflow property portfolio could have some cashflow issues.
I enquired about a mortgage when interest rates were 2%. The bank seemed quite reluctant and even suggested I sell instead of buy. I was quite taken aback by this as my equity and other investments were good.
Now I think the bank's mortgage guy knew something was up but couldn't tell me directly. His sell advice was very good in hindsight.
This wasn't my intention - more to highlight to ZS that his gain was likely somebody else's pain (which he didn't appear to consider about in the initial post).
And if a FHB, could be seriously bad for them going forward if rates keep rising and prices keep falling.
Perhaps it should be looked at with a narrower lens, a banker to a specific client. It wouldn't necessarily be a bad end of that transaction for someone to buy a house to live in or for someone who had just sold for a good price to buy.
I would be fairly gutted if I sold a property to a FHB that collapsed in price soon after. I wouldn't be comfortable with that at all. If the buyer was a landlord or just someone changing houses then that would be fine.
I wonder/ed how long before the property spruiker club turn on one another.
It was the same in the US during the GFC. Before the bust they would boast to one another how great things were and be all matey matey - but as soon as the market started tanking then they all desperately turned on one another as they tried to get out of the market and pass their bad debt to somebody else. They tried to sell their mates down the river by offloading their bad debt to them - each trying to stab the other in the back.
I learnt a lot about human nature from this. Some people will pretend to be your friend in goods times, but turn into something else in the bad.
Dude, hold my bag, just for a minute:
Hold My Bag Brad GIF - Hold My Bag Brad Night Of The Creeps - Discover & Share GIFs (tenor.com)
I dont think inflation is as contained as some announce, food prices 12% plus , greener cars dont come cheap, the days of $8995 low km runners is near all but gone (now 20 to 30k) . For low income earners inflation is still very much a feature of day to day life. What could be a nuisance is foreign money attained at lower rates skewing local market values . Have we become the rip off society (Low wages/High prices) some used to portray in times passed? I doubt that any move by the RB will significantly alter the landscape as many just are not in any position to push back or rejoice . The weather certainly seems to add to the doom and gloom.... best way of moving forward is to expect another hike because if it doesnt happen its a small victory .
Ultimately it's the politicians and their votaries of the last 20-30 years who made property into a get rich quick scheme to serve their own entitlement mentality who should bear the credit for screwing up NZ society. It was stupid to think passing ever greater debt to following generations so as to live beyond one's means was anything other than selfish, short-termist, and ultimately unsustainable.
OCR should balance out at around 7% and stay there. NZ housing inflates by this much every single year and should be a good indicator of what inflation is doing behind the scenes. NZ should take a page out of Japan's book, and treat real estate as a non appreciating asset, which requires rebuilding every 30 years, it would make living in an earthquake prone area safer.
Reduce minimum wage back down to $10 an hour and see inflation dissappear
The funny thing is that it will keep going up until inflation is tamed. The more people try to slow the OCR rising and the govt spend to fuel inflation.. the higher it will ultimately go for longer - and the worse the economy and our std of living will become.
The more Orr pauses, the more the govt spend.. the more I invest anticipating a harder landing for NZ and the housing market.
We have no tool other than the ocr.. those that are overleveraged or who work in residential are strangely better off with fast and hard ocr rises and govt cutbacks... than being thr proberbial slowly boiled frogs... lol.
That said.. human nature being what it is, it being election year and Orr being very hard to predict.. leads to a very interesting couple of years .
Ps wouldnt want tk be a mortgage broker.. seriously like their little heavenly economic bubble popped and left them nowhere to go.
The reserve bank has lost its power with home owners as the three to five year rates sit at 5.99. The reserve bank may be able to influence one and two year rates but onoy a few home owners are going from a rate 3.5 will select 7 or 7.5 rate when they can select 5.99.
Remember during covid when we locked the entire country down because there was a risk to a very small % of the population. Drastic measures were accepted by the country then. I propose the following.
The government issues 30 year mortgages at 4% for anyone who purchased a home (not an investment property) in the last 2 years.
Everyone happy with that?
Best thing the RB can do is ignore the Mister Cunninghams of the world and get on with the job.
Disinflation is always painful. That's why letting the inflation genie out of the bottle in 2020 was so regrettable.
But to stop tightening now would be to perpetuate inflation and that will do no one any good.
Using "Kiwi" in an English sentence without following English rules for pluralisation (i.e. not "Kiwis") sounds really weird. I get that it's the correct thing to do if you assume that it's a Māori word, but really it's an English loan word. We are "Kiwis".
"Kiwi don’t need the screws tightened further via more interest rates hikes. Kiwi need someone to cut them a break." This sounds like someone called Kiwi referring to "themself" in the plural third person. It sounds like a nutter.
Labours policy responses are coming home to roost....
Unfortunately the tab is being passed onto households... which are getting inflationary pressures and increased mortgage costs all at the same time
Fiscal discipline seems to be missing from this government, and we're paying the price for bad decision making
More Squirrel Cunningham in the media.
https://www.newstalkzb.co.nz/on-air/kerre-woodham-mornings/audio/david-…
Can anyone provide any insight here?
A family who bought a house 3 months ago is already in cashflow stress?
Wouldn't lenders have applied mortgage stress test rates of about 8.6% when assessing their loan serviceability?
"Most of the couple’s income goes towards the mortgage after buying their house for $805,000 three months ago."
“Even after working as an Uber driver for five days, I am short of $450 every week,” Sunny said.
https://www.nzherald.co.nz/kahu/peak-ocr-pain-auckland-couple-working-f…
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.