The final instrument

We are living in interesting times, with the fallout from the last subsidy round of the 2020 lockdown pushing inflation north of 3% beyond the Reserve Bank’s perimeter. With all this extra income and low interest rates, the average citizen has been provided with disposable income and has spent accordingly. You might be forgiven therefore, in thinking that the current lockdown (August 2021) is like attaching SpaceX rockets to the runaway inflation train.

The RBNZ however, does have a plan as it searches deep into the ‘tool box’ after utilising the band-aid like other tools which have had a minor effect. As they rummage through the tool box they will come across the nuclear button, the one they have been avoiding using since we went into lockdown in 2020. This button takes the form of the Monetary Policy Review (OCR) which was taken down to 0.25% during the last lockdown in March 2020. Although the recent Monetary Policy Statement has kept the rate at 0.25%, the RBNZ has said that its short-term forecast is that it will need to increase.

When this wholesale rate increases, the banks will typically follow suit and increase the mortgage interest rates. I think we all knew when the property market took off that these other tools such as the extension of the bright-line test, the reduction of interest rate write offs and further restriction of the LVR’s were simply a front-line troop defence while avoiding the nuclear button.

REINZ has reported that although demand has tailed off a bit, in July 2021 the average asking price in Auckland has gone up by 27.7% from July 2020.(1). The company further reports of other centres around NZ:

“ Other house price increases (medium prices) in July 2021 included Hawke’s Bay (up 40% to $560,000), Bay of Plenty (up 20.7% to $907,527), Waikato (up 27.4% to $790,000), Far North (up 19.1% to $571,000), Christchurch (up 22.2% to $491,000) and Otago (up 14.1% to $585,000).”    

One could argue that the recent tools/regulations that the Government has used, needs to have time to work as it has already been shown that demand has recently waned(2). With demand dropping off and investors scared to sell due to the lengthened bright-line test(3), the prices are unlikely to come down in the medium term but more likely to stagnate. So what to do?

With little else left in the tool box, the govt reluctantly wavers their finger over the nuclear button in order to finally put a halt to the rising property prices.  Seeing this coming, opposition MP Nicola Willis asked Adrian Orr (Reserve Bank Governor) a question that many of us have been worried about:

“Reflecting on how badly wrong the Reserve Bank’s forecasts have been on house price-growth, do you think you turned the money hose on too hard in 2020?” opposition National Party MP Nicola Willis asked(4).

This was followed up by the statement from Nicola:

Are we not in a situation now where, with the least affordable housing in the developed world, with people taking on significant amounts of debt, that the Reserve Bank will be constrained in its ability to lift the OCR in future because of the financial stability risk that may pose to household budgets?”

A very good question and I can imagine you are sitting on the edge of your seats waiting to see how the Governor replied. The answer was along the lines of what the RBNZ was required to do, to keep the inflation between 1 to 3% and target employment rates. Their job was not to reset house prices.

When the interest rates go up, the reality of this means the middle income families will feel this more than the higher income segment, but there seems no way around it.

However, looking on the bright side, many of us are quite happy with at least an extra half million in equity that we now have to either draw on or pass on to our kids. With the quantitative easing (cashflow) and equity coming in, the business confidence has soared and people are generally happier.  Fore-warned is fore-armed however and we now have a choice. We can do nothing or we can do the smart thing and fix our interest rates to give you surety that you stay within your budget over the next three to five years.