Reserve Bank boss Adrian Orr warns first-home buyers mortgage rate shocks are 'part of the real world'

After this week's interest rate hike, Adrian Orr has a simple message for people who got on the property ladder by borrowing big: welcome to the real world. 

The head of the Reserve Bank told The AM Show on Thursday it's his job to ensure inflation stays low and stable and employment is maximised, not to cater to the whims of homeowners. 

"There are exporters, there are importers, there are consumers, there are investors, there are savers, there are borrowers - focusing on one specific sector of the economy is not something the Reserve Bank does or could do."

The bank hiked the official cash rate (OCR) by 0.25 percent on Wednesday to 0.75 percent, the second time it's gone up since the start of October after seven years of cuts. 

"We've been very pleased with the fact that we've come through this COVID period and here we are with very low unemployment, a growing economy," said Orr. "We're seeing shortages everywhere - that's leading to cost pressures, inflation pressures, and so we are shifting the official cash rate gradually."

Making it cheap to borrow has been blamed for an unprecedented rise in house prices, hitting over 30 percent nationwide year-on-year. First-home buyers are having to not only come up with deposits tens of thousands of dollars larger than they used to, but borrow hundreds of thousands more.

While some property analysts have claimed low interest rates have made home ownership affordable despite rising prices, that's not going to last. 

Orr said by late next year the OCR will likely be a "neutral" 2.5 percent - five times what it was just two months ago.

"When you're buying a home, it's a significant investment. You need to be buying it with a view to the long-term. You need to be able to weather ups and downs on interest rates.

"We've been saying for a reasonable period the current level is historically low because of the unprecedented economic shock. We are very pleased we are through the worst of that and can start to renormalise interest rates. 

"You have to be able to think hard around your ability to weather higher interest rates through time and manage periods of uncertainty. I'd say have a good conversation with your bank, interview yourself very hard around what you believe you are trying to achieve, because this is part of the real world."

Milford Asset Management investment analyst Katlyn Parker told The AM Show recent first-home buyers might be in for a shock. 

"If you purchased a house this time last year and fixed in a mortgage of $700,000 for one year and you go to refix that mortgage today, on the current one-year rate that's an extra $400 that's going to be coming out of your bank account... it is inevitable you will see a squeeze on household budgets." 

Orr said renters fearing they've missed their chance to get on the housing ladder might one day be thankful they didn't, however. 

"House prices are at an unsustainable level. They are beyond what we can explain with rational economics, so our view is that prices will ease... If you miss out right now, you may be thanking yourself in two years' time or whenever that is, because you can enter the market at a different level. Think hard about your choice of investments."