More pain on way as homeowners face rates hikes, expected recession


A mortgage advisor says small business owners are particularly nervous about the impact of the increasing mortgage rates, while homeowners face a precarious battle to afford repayments.

The Reserve Bank raised the Official Cash Rate by a record 75 basis points, and warned of a coming recession next year.

Squirrel Mortgages founder John Bolton said many people were already fearful of where the mortgage rates would end up, with small business owners particularly worried.

Small business owners were having to deal with higher mortgage rates on their own properties while their customers had their discretionary spending cut, he said.

"Not only do they have mortgages are have to pay more for their mortgages, they're having to deal with inflation running through their businesses at the same time as discretionary spending is getting absolutely hammered through these higher interest rates, which is obviously going to hit their businesses as well."

Bolton said most New Zealanders fixed their mortgages for only one or two years, so many would had to refix soon at a higher rate.

Mortgage broker Malcolm Knight from Advice Knight told Checkpoint there were strong economic headwinds hitting New Zealand shores a lot faster and harder than some people had been anticipating.

People had been contacting him asking advice on refixing their mortgages now rather than later, foregoing the cheaper mortgage rates they had now to fix more expensive rates for certainty going forward, he said.

"It's a really bitter pill to swallow when you're suddenly on a nice 2.99 percent fixed rate.

"The bank doesn't mind you're getting out of it, and they'll only charge you say, a $10 admin fee. But then you're thrust straight into a 6 percent rate, which can have a fairly profound impact on your repayments.

"And if you're looking at a paying an $800,000 mortgage, which is not untypical in an Auckland context, breaking that from 2.99 percent, to say a 6.1 percent rate today, you're looking at $1500 a month extra cost and with with the price of groceries, cost of fuel... an extra $350 a week can be quite hard to find for your average couple."

People were avoiding big-ticket items at the supermarket like cheese and steak, he said. With discretionary expenditure contracting rapidly, cafes and restaurants were again likely to suffer.

The falling amounts banks were willing to allow customers to borrow is impacting on falling house prices, but that's not making it any easier for those looking to buy a house. Rising interest rates and a cost-of-living crisis were proving prohibitive to borrowers.

"If I think about a customer a year ago, I may have been able to get them a million dollar loan," Knight said.

"Today I might be able to give them an $800,000 loan, but what interests me is the whole behaviour and sentiments change - that this million dollar-loan client would have been thinking 'oh, is that enough money, I might need to borrow another $100,000 to really get that house I want.

"At the moment you're sitting down with them and saying 'we can borrow $800,000, here's what your repayments are going to be and they kind of suck in, going 'oh, I don't know if we can afford those repayments'."

ANZ chief economist Sharon Zollner.
ANZ chief economist Sharon Zollner. Photo credit: RNZ

Human pain for inflationary target gain

ANZ chief economist Sharon Zollner told Checkpoint the Reserve Bank's basis point raise was a blunt instrument in tackling inflation and that there would be a pain down the line for those with mortgages and others who had taken on debt over the past couple of years.

However, she pointed out not everyone had a mortgage and those with savings would be happy with interest rate hikes. Only 2 percent of households were in negative equity so far, she added.

The NZRB tool to reduce spending is set to increase the unemployment rate, with basis points reaching 5.5, and a recession expected to hit by the middle of next year.

So far the bank had not put enough pressure on households to "slow down spending", so now the public faced an even more brutal stick to encourage them to, Zollner said.

"I think the Reserve Bank doesn't want anyone to borrow with confidence at the moment, I think that's kind of the idea.

"They really want to slow the economy down, it's very clear that they feel a real sense of urgency. Even though they're a year into hiking, they have to some extent been running to stand still in so far as the whole economy is hiking, wage growth has been very strong.

"Households have been remarkably resilient to the pressure that's been put on them so far, including not just interest rate hikes, but the cost of living as well.

"So while that's good news, and one thing, it's not helpful if you're actually trying to slow spending down."

The bank was now forecasting unemployment to reach 5.7 percent instead of 5 percent and Zollner suggested this was a target figure to get inflation down.

"Clearly raising rates this aggressively and carrying on with it does mean downside risks for the housing market. And and a risk that that could become less orderly than it has been so far.

'I mean, I think that is actually quite reasonable to interpret that as the Reserve Bank's current best guess of how high unemployment needs to go to nip this wage-price spiral now looking well underway, to be honest, to nip that in the bud and ensure price stability in the medium term."