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The Effect of Mortgage Rates Rise Is Still To Come
The Governor of the Reserve Bank of New Zealand (RBNZ) Adrian Orr last week stated that the effect of rising mortgage rates is still to be fully felt across the wider economy.
In a statement to the Parliament’s Finance and Expenditure Committee, Orr said that it can take anywhere between 18 months and two-plus years for the RBNZ’s monetary policy decisions to take effect and for the economy to shift accordingly.
So, even though some mortgage holders will no doubt already be feeling the additional costs from the RBNZ having lifted the Official Cash Rate (OCR) from its record low in 2020 and 2021 to permit higher central cash flow, a significant amount of mortgage holders are yet to re-fix their mortgages at the higher rates.
According to the RBNZ, over half of New Zealand’s stock of fixed-rate mortgage lending is expected to be re-fixed this year. Since the average rate of this stock of lending is still relatively low, the actual impact of the rising rates is yet to come.
The latest data shows that at the end of March the average mortgage rate across the country’s cache of fixed lending was about 3 percent. This is a considerable amount below the 4 – 5 percent that mortgage holders, at this time, were fixing at which shows that it takes some time for changes to the OCR to permeate the economy.
So, even though the rise in the OCR and the rise in retail mortgage rates is prominently in the news cycle, as Adrian Orr warned, it will take some time for them to tangibly settle things within the economy.
Yet, the chief economist at Kiwibank Jarrod Kerr, believes that the comparatively aggressive approach that the RBNZ is taking towards actively combatting inflation will nonetheless see it cool the economy quickly, at least by historic standards.
The OCR increased from 0.25 percent to 1.5 percent in the six months to April, and is anticipated to be lifted to 2 percent on May 25. The RBNZ has projected that by mid-2024 the OCR will be lifted to around 3.4 percent. In a concerted effort to mitigate excess capital expenditure and inflation.
The acute cooling effects of these increases will be felt by those mortgage holders who fixed at shorter terms in 2020 and 2021. While the effect on those who fixed at longer terms will be felt in the next few years with the projected incremental increases to the OCR.
The reason why mortgage holders are excessively sensitive to interest rate changes is because New Zealand has such a large amount of mortgage debt. Estimated to have topped $335 billion at the end of March.
Some think that this sensitivity will make the RBNZ reconsider their projected OCR increases. Yet, since some mortgage holders kept their interest payments up when rates were at all-time lows, their disposable incomes won’t be eroded away as rates rise.
However, higher mortgage rates are still going to squeeze a lot of households’ pockets which will mean consumer confidence in the economy won’t be particularly high. As coupled with the increases in cost of living, many people will have to now be careful with what they spend.
Business investment is likely to take a hit as rates continue to rise which will mean that business activity in the economy is likely to be dampened for the short term. This will be reflective of overall business confidence in the economy and in those decisions made by the RBNZ and central government.
Even for the most fiscally austere companies, the next few quarters are looking likely to be difficult for most businesses. With an expected reduction in corporate confidence in a high interest rate and inflationary economy resulting in less short-term business investment.
Long term however, things should pick up as the RBNZ’s monetary policy changes settle more resolutely across the domestic economy.