'Give it a few weeks and the interest rate rise news will be fish and chip paper', says Olly Newland

'Give it a few weeks and the interest rate rise news will be fish and chip paper', says Olly Newland

By Olly Newland

The Reserve Bank finally raised the official cash rate by  0.25% to 2.75% as has been already  anticipated for many months.

You would think, by the reaction from some quarters, that the end of the world was coming and round two of the GFC was upon us.

Already the ANZ and the ASB have announced an 0.25% increase in lending rates and no doubt the other banks will follow as they have been "instructed" to do by the RB.

Don't be fooled folks.

This is all window dressing and a little calm logic will reveal it to be so.

Firstly investors need not take fright as any increase in costs ( interest being one if them) will give investors a small tax benefit. But more importantly any increase in costs will be passed on in rents as it inevitably must do.

It won't be over night but it will happen.

Then, as must happen, the renters will pass their increased costs onto their employers who will pass the extra cost back onto the public and so, over time, we have the beginnings of the wage/price spiral which is not only corrosive but also inflationary to the economy.

Most borrowers will hardly notice anything even if rates rise by 1 or 2% as one way or the other the costs will get passed on and it will be business as usual.

As evidence of that go for a walk or drive and witness the restaurants and cafes bursting at the seams with people who will spend the equivalent of  three months interest rate rises on wine and food within 2 hours without blinking an eyelid in the process.

Likewise in electronic and appliance stores, car yards, jewellery shops and art sales etc, the cash being spent in a single hour makes the few dollars week extra in interest look like kids pocket money.

And here's another thing: If interest rate rises really work as the RB wants them to, then logic dictates that more people will leave their money in the banks, while more people will borrow less from the same banks.

As banks must lend or go broke there can only be one outcome as a result.

A nasty squeeze on bank's margins between what they pay to depositors and what they lend that money out at.

After all, banks are merely wholesale and retailers of money and the difference between the two is their profit.

It is therefore highly likely that there will be a break out of a further round of "mortgage wars" as banks vie with each other to attract borrowers.

For the next little while there will be some huffing and puffing but I am sure that "specials" will soon appear that will cut lending rates to close to what they were yesterday.

One more thing. If interest rates rise because of inflation, guess what the first thing will be that will inflate?

You guessed it: House prices.

Rising interest rates feed directly into the cost of building materials, labour and the possibility of making the housing shortage even more severe than ever.

You only need to look at history for proof.

Interest rates were well over 10% during the 1971-75 boom and house prices more than doubled despite that.

Rates reached 20% plus for mortgages during the boom of 1981-87 and indeed carried on just as high for several years after the ‘87 share market crash.

Even in recent times from 2001 –2007 rates were around the 10% mark and house prices still continued to rise.

Rising rates will curtail building, especially of affordable homes, exacerbating the shortage and opening the door even wider to the vast numbers of offshore buyers and syndicates who have access to endless amounts of cheap money.

Give it a few weeks, and the interest rate rise news will be fish and chip paper, of that I am sure.


Olly Newland
www.ollynewland.co.nz  Used with permission.

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There is a lot of short termism in the endless commentary around the rates.  Possibly more commentary before the announcement that after.  Tedious discussion.
Similarly the pundits have been distressed by announcment of an election date.  Shuts off the endless waffle about which date it might be.  Journalists will now have to find something more useful to speculate about.  (Probably will find something equally pointless) 
If you have been unwise enough to borrow to the absolute hilt, then it should have your attention the noose is already around your neck.   Only then, and you are few.
And as for the endless fix/float debate.   It's not important if you have a 30 year mortgage, and you can only fix for a small number of years.  

And as for the endless fix/float debate.   It's not important if you have a 30 year mortgage, and you can only fix for a small number of years.  
Really? In my household savings thousands of dollars a year is pretty important. If you are smart and a little bit lucky by making good decisions around fixing vs floating you will potentially saves tens if not hundreds of thousands of dollars over the term of your mortgage. Why wouldn't this be important?

Fair point.  Saving any cent on interest rates will help, and perhaps a lot over 30 years.
I guess I should have emphasised the risk reduction element.  Where a fixed rate might save you from disaster for a year or two if you are mortgaged up to the ears.  But only for a year before you are foreclosed etc.

I don't think most people understand risk. One is wise to never expose themself to too much risk. Fixing for a year or two is quite risky if you are mortaged up to the ears and interest rates are rising. Fixing for four or five years is a different matter. After five years it's reasonable to expect your income will have increased a fair bit, your equity in your property should have grown. There is still some risk with the five year scenario but I think it's a lot less.

Possibly not at .25% but let it creeps a little more towards 1% and we'll see quite a few punters are going to drop out of the Real Estate's hampster wheel - 2009 was an good example

Your incessant moaning is betraying your obvious vulnerability to the increased cost of borrowing.
(cue the 'I got a $10000000000 pay rise this year and so interest rates rises dont really bother me' response.)

King of the Whiners - inflation is more beneficial to those with assets with debt than those sitting in cash.

Didnt hear you complain about the windfall you got when Bollard cut interest rates by 50 basis points reducing your borrowing costs by 10% on your $2.5 million borrowings. Nope, you complained it wasnt enough. You waged a constant campaign, wanting even more. Now you have been proven wrong what about a mea culpa. Should we hold our breath?

At least you know what you are getting with Olly:
- Interest rates up = house prices will go up
- interest rates on hold = house price will go up
- interest rates down = house prices will go up

Olly the greatest “spruker” of our time, is a bias commentator with narrow views and a conflict of interest.
The mention of the Great Financial Crises only confirms his emanate concern; property being the cause - look whats happened since 2008?
Good golly Olly “more importantly any increase in costs will be passed on in rents as it inevitably must do” Tee he he – Don’t forget that renters can simply move sweetie.
The Government is against you. Knowing affordable housing is an essential need for a societies well being and the economy to grow.
Enjoy the fish & chips!

Olly has summed this up pretty well.

You would think, by the reaction from some quarters, that the end of the world was coming and round two of the GFC was upon us.
Who are these folk that have Ollie so wound up?

Investors need to have a keen awareness of the interest rate environment – how higher rates might affect their expected net return and the market for their property should they wish to sell. They also need to make sure the return or ‘yield’ from their property stands up against the return they might have achieved had they invested in shares, for example.
....... property should account for perhaps 10 per cent of an investment portfolio......
we think the comment below, makes better reading than that above..

Olly, instead of giving us your predictable rethoric on how house prices will go up infinately regardless of affordability, tell us how you think house prices will get back to normality. Reading your articles over the years is quite amusing. Your belief is that prices can go up infinately regardless of affordability. Could you be biased perhaps? Making lots of money perhaps Olly?

 From Olly Newland's facebook page
"Interest is a cost on all of society, not only property but businesses, wages and salaries as well.
Increased costs result in two things:
1. The price of all goods and services rise to cover the additional costs
2. Demand will drop as people refuse or are unable to pay the exta costs.
Hence property prices would drop as interest rates rise.
However pressure from shortages of housing, immigration, and over seas buyers is very likely to swamp the downward pressures in prices,
It follows that building and development costs will rise as interest has a direct impact on new builds. This then flows directly into the used house market.
That's why house prices will continue to rise, albeit at a slower rate, until such time as much higher interest rates either cripple the economy or cause another round of out-of-control inflation.
House prices can fall dramatically. as has happened in many over heated markets in recent times. While some may cheer, the result is chaos and ruin for many, especially for the less well off. 
Making more  affordable houses available to steady the market is the only answer either as rentals or to buy.
Higher interest rates will produce exactly the opposite result. "