Economists issue warning after financial stability report paints grim picture of NZ economy as interest rates skyrocket, house prices plummet

Kiwi homeowners are bracing for more pain after a recent report painted a grim picture of New Zealand's economy. 

The latest Reserve Bank of New Zealand (RBNZ) financial stability report warns a global economic slowdown is threatening Aotearoa's outlook and says spending is likely to slow as households grapple with higher mortgage repayments and a decline in wealth as house prices plummet. 

The report also warned a large number of home loan borrowers could find themselves in negative equity if house prices keep tumbling. Currently, about two percent of borrowers are in negative equity, but that could jump considerably if prices fall by a further 10-30 percent. 

The average percentage of people's disposable income used on debt servicing is expected to jump from 9 percent to 20 percent based on current mortgage rates. 

Speaking with Newshub Late on Wednesday informetrics economist Brad Olsen said there's no doubt many Kiwis are heading for a challenging time. 

"The worry as we go forward is, we know we've got to lift interest rates to try and get inflation under control but it does cause some huge challenges for households and businesses," Olsen said. 

"There are some people who have got a mortgage not only for their own house but also that underpins their small business in this country [and]those people are going to be worried about what those mortgage rates mean and if they have to sell up, if they do hit a financial crunch, just how fortunate or not might they be?"

To add to the challenges, extremely low unemployment rate and strong wage growth are making it difficult for the RBNZ to get inflation under control. 

The latest Statistics New Zealand employment figures, which were released on Wednesday, show the unemployment rate is at just 3.3 percent while wages increased 3.7 percent in the year to the September 2022 quarter. It comes as inflation remained strong in the latest figures at a whopping 7.2 percent, down just 0.1 percent from 7.3 in the previous figures. 

Olsen said while the low unemployment rate is good it also highlights just how overheated the economy is, and makes it harder for the RBNZ to tame inflation. 

"It effectively means we're still trying to work beyond our means," he said. 

"We're now seeing wage increases of such a magnitude they are starting to flow through to inflation. So the pressures that we're seeing there are intense. 

"The other difficulty though, the complete flip side, is of course having lots of people in employment means that they have money to pay their home mortgage off. 

"So a huge tightrope really for the Reserve Bank and the Government to go through here. They want to get inflation under control, they want to keep as many people in jobs as possible but I think we will see the labour market shift in the next year because at the moment again, we're trying to do too much." 

Economist Tony Alexander told Newshub at 8pm while it's undoubtedly a tough time, it's important not to panic. 

"The Reserve Bank hasn't actually predicted a big decline in house prices, it simply pointed out if they were to fall maybe another 10 percent from current levels, maybe up to 7 percent of people with mortgages would be in a negative equity situation," Alexander said on Wednesday. 

"But I'd consider that pretty much an outlier situation given the strong labour market and good job security. I think it's pretty unreasonable to be thinking the housing market's going to be falling away to a great new extent." 

Alexander said banks are generally very responsible lenders and factor mortgage rates increases in when they approve home loans. 

That combined with the fact mortgage rates aren't actually very high when compared to the past 10 years, means New Zealand is well-placed to manage the challenges. 

But Alexander did acknowledge the speed of increases has been abnormal. 

"It is a bit of a shock in terms of the speed of increase… So yeah it was definitely a short period of time but worse things are happening overseas with the speed of increase there. 

"This is what we get when we have a global pandemic and clearly, none of us had the foggiest idea what it was going to do to our economies, house prices, etc… 

"And a lot of the jump in inflation and interest rates at the moment is because central banks have realised actually they overstimulated their economies. There's a catch-up underway," he concluded.