Reliance on housing being the sole source of wealth is changing and will continue to change, Reserve Bank Assistant Governor Karen Silk says

Reserve Bank Assistant Governor Karen Silk says the reliance on housing being the sole source of wealth is changing - and will continue to change as the world shifts.

Last week, the Reserve Bank’s (RBNZ) Monetary Policy Committee reached consensus on raising the Official Cash Rate (OCR) by 25 basis points to 2.50% from 2.25%. Since then, some banks have increased their floating rates and savings rates. 

Speaking to Interest.co.nz on Monday, RBNZ Assistant Governor Karen Silk said "where the OCR has the greatest impact is in that short end ... up to 12 months, 18 months, kind of impact ... [It's] not surprising that you see some of that jump a little, and that would have some flow-on impact potentially into mortgage rates at that end".

“The longer end wholesale rates had moved down quite substantially," she said, and there already had been an increase in the two-, three-, four-, five-year mortgage rates a few months back.

"The margin has widened on those," Silk said. "There was no real imperative there for the banks to increase those longer-dated mortgage rates. but obviously the outlook from here really depends on what is going to happen globally as well as domestically.”

'Reliance on housing as your source of wealth will change'

Asked about discussions on interest rates and whether they could sometimes be too focused on housing, Silk said: "That's a reflection, I think, of New Zealanders' long-standing position of 'I create wealth through owning my house or buying more houses'." 

Silk said housing had become almost a substitute wealth channel and so the focus on mortgage rates had also become a big thing.

“What we need to be thinking about is how does that investment broaden and move away from it just being a housing story into something that is much more productive, which allows the economy to continue to grow. And as that grows, that means that incomes can grow, more people are employed," she said.

If there isn’t that broader story when it comes to interest rate movements and the focus was just on housing, Silk said: “Interest rates can almost exaggerate parts of the cycle but if you can extend that into a much more productive economy, and people are investing in a productive economy, then that takes away all of that cyclical aspect that is sitting there.”

But just having a higher interest rate wasn’t going to solve these issues, Silk said, and there were real reasons why house prices have increased over the long term, which in part reflected undersupply. 

“A lot of work has been done over the last few years in terms of changing the conditions to improve levels of supply of new housing in the market, and so that means that demand and supply, the disconnect between the two, is starting to close … That reliance on housing as your source of wealth will change.” 

Silk said we’re in a bit of a changing world and used other economies as an example. 

"If you think about some of the things that have happened in other economies where you've had more focus on building that longer-term investment profile. The level of financial literacy goes up and the flow-on impact into a more productive economy ... There's evidence that is there," she said.

“The reliance on housing being the sole source of wealth is changing and will continue to change.” 

The lesser of two evils

Following the OCR increase, BNZ head of research Stephen Toplis said people understandably think rising interest rates are bad. 

“They think about it in terms of having to pay more on their mortgages and the fact that tends to slow housing markets down, and the like, but I think we get over consumed with housing market-associated news.”

Toplis said: “If you stand back from all of this, and say, ‘what is the thing that has hurt New Zealanders most over the last five years?’ I don't think interest rates would be the one that pokes up to mind. I think it’s inflation.”

“We should be learning from that. Rising interest rates do hurt people; no one's pretending otherwise, but it can be the lesser of two evils, and to me that message hasn't sunk in.”

For Silk, inflation is a shocking thing.

“High levels of inflation does reduce your purchasing power," she said.

"When you’ve got a high inflation scenario, you can buy less and less for the same dollar and that constrains demand. It reduces activity in the economy. It is an incredibly negative thing from that perspective.”

She said moving interest rates around was about trying to get stability back into pricing.

Having that type of stability meant wages could keep pace with changing prices, there’s certainty for businesses and you see investment start to happen, she said, and this led to the job growth cycle improving. 

If there was price volatility or prices continued to get higher and higher, you’d see demand fall out of the economy and as a consequence you wouldn’t get growth and long-term investment, Silk said, which was a "bad position for an economy to be in". 

“The best thing you can have is a stable price environment because then people understand what they can purchase for every dollar spent.”