Chapter 1: What is the main topic discussed in this episode?
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Chapter 2: What prompted the Reserve Bank of New Zealand to raise the OCR?
And the Reserve Bank in New Zealand has raised the official cash rate by 25 basis points, which is a quarter of a percentage point to 1% due to strong rising prices, a very hot housing market and a tight labour market.
And the Reserve Bank said that it was concerned that inflation, which was forecast would reach 6.6% this year, would get entrenched and said that house prices were expected to fall perhaps by as much as 10% in the coming year.
Chapter 3: What are the implications of rising inflation on the housing market?
It also went on to say the underlying economy was underpinned by strong exports, healthy consumer and business finances and government spending. But it did warn in the short term the economy could be knocked around by the current Omicron outbreak.
And the Reserve Bank New Zealand Governor Adrian Orr said the decision between a smaller and bigger rate rise had been a finely balanced decision, but a bigger cut in the future could not be ruled out. Well, let's welcome in Brad Olsen, an economist at Infometrics in New Zealand. G'day there, Brad. Welcome to the Real Estate Podcast. Thank you so much for having me on. And where are you?
You're in Wellington with those protesters outside Parliament, are you?
I am. I'm trying to avoid getting harassed down that end of town, but yes, no, settled here in Wellington and trying to keep well clear of all of the disruptions we seem to be having, trying to miss Omicron 2.
Chapter 4: How is the current geopolitical situation affecting economic stability?
Yeah.
Yeah, well, good luck with that. They've been there for what, nearly two weeks, isn't it?
It's probably over two weeks now, or it certainly feels like it. There's still a lot of tension down there, but it has thinned out a bit more.
Chapter 5: What challenges do new homeowners face with rising interest rates?
It's very much now a pretty rowdy core of protesters emerging, still making everyone feel very, very unsafe, very, very unwelcome in their own city.
Yeah, well, talking of uncomfortable, Adrian Orr is saying the economies around the world are starting to re-normalise themselves after coming through the global economic shock. But does that go out the window a little bit now after yesterday's invasion of the Ukraine by Putin?
Yeah, there is certainly a feeling that the world has been further upended. We weren't fixed, we weren't necessarily normal yet, but we were looking to establish what the new normal might look like, what the sort of new trading conditions might appear as for the global community. That has gone out the window in my mind. We've got armed conflict in Eastern Europe.
Chapter 6: How are interest rates impacting mortgage repayments for homeowners?
We've got the Armed troops on the ground, missiles being fired through the air, nuclear threats being passed along. It's about as real as it's ever going to get. And what it does, in my mind, is just stoke that uncertainty that we've had persisting over the last few years, but exacerbates it. This is a whole different kettle of fish. You know, we're now grappling a pandemic alongside war.
So it does very much, I think, unsettle expectations that we're sort of through the worst of it and that we're necessarily rebuilding on a better path. It's never, in a sense, been more uncertain than it is today.
And the governor of the Reserve Bank, he also said that some new homeowners who have taken on a significant amount of debt could see small changes in the value of their asset and could also find themselves in a positive or negative equity situation. That's a little bit troubling, isn't it, if somebody's just purchased a house with a big mortgage?
I think it will be making some households very uncomfortable, that thought of possibly being in negative equity. It really does highlight the perfect storm we seem to find ourselves in. We've had house prices increase nearly 30% over the last year or so, but for the last two months, slight monthly, month-to-month falls, and you are seeing as well those interest rates start to rise.
Chapter 7: What strategies should homeowners consider with increasing mortgage rates?
A lot of first home buyers have had to add Absolutely put everything on the line to get onto the housing market. I often refer to it as having to pole vault onto the bottom of the housing market ladder because you're spending now on average 12 years saving up your mortgage deposit. So you're having to sort of find and scrimp and save every dollar.
You get on the housing ladder, you've got a very, very expensive property, over a million dollars in most cases. And now interest rates are turning around. Now house prices are shifting away. So for new buyers recently, they might well find themselves with a house that is worth less than they originally paid it, but with some pretty big mortgages to pay, especially as interest rates rise.
Yeah, exactly. And the governor of the Reserve Bank also said that house prices were expected to fall perhaps by as much as 10% in the coming year.
Chapter 8: How will the conflict in Ukraine influence global inflation?
Now that was also made the other day before the invasion. So everything now, you just get this feeling that there is a little bit of this instability that's going to creep in.
Absolutely. And I think, you know, the Reserve Bank's expectations around house prices have massively shifted from last time. Back in November, their call on house prices was far, far more upbeat. They thought they were going to continue to go up and up and up before they eventually showed some sort of slowdown or flattening in house price growth to be picking, you
Falls now is quite a big move, but it is also in keeping with other expectations. And I guess a big driver of that expectation on the housing front is because of those rapidly rising interest rates. We've seen a one-year fixed rate increase by over 100 basis points in the last year. That's starting to really impact.
people who are trying to get lending because they're going, well, gosh, I've got to pay a lot more now to actually service the mortgage. Can I make this work? And so, look, you're completely right. The instability in the Eastern European area, what Russia does next and what the implications are from the global financial markets is huge.
But the domestic uncertainty still remains because, look, after a 30% rise, you are sort of seeing some big changes around the market. And there is a complete surprise over where we actually head to next.
And talking domestic, what should Australians with mortgage take from this OCR rise and is it something that they should be concerned about at all in terms of what's happening in New Zealand?
I think we are certainly seeing some big shifts. One of the biggest from the Reserve Bank this week was actually the increase in just how much they thought they'd have to lift over the next few years. Back in November, again, they were expecting they might have to take the official cash rate up to an average of sort of 2.6% in 2023-24. They're now expecting they might have to take it to 3.4%.
So that very persistent level of inflation is very much starting to worry them. Their job, remember, is to make sure that inflation tries to get to that 2%. They're currently running at 5.9, expected to peak at 6.6. They're failing their jobs, so they're having to have to pull out the big guns to try and get inflation back under control.
And that is going to require them to be a lot more brutal, a lot more forthright on the mortgage rate front. So we are expecting that mortgage rates will go up. So for those that have property at the moment, that have properties,
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