Quantitative Easing

It’s interest rates, stupid – house prices and interest rates create political pain

Dileepa Fonseka writes about business and politics.

OPINION: Economist Leith van Onselen of Australian blog Macrobusiness has an idea for the title of his next article: “The Reserve Bank of New Zealand will kill the government”.

Australians and others around the world currently have their popcorn and webcams focused on the canary down the coal mine that is the New Zealand property market.

They seem to be waiting for the canary to not only be engulfed in smoke, but engulfed in flames.

* The world is watching the New Zealand property market as Auckland is labeled a ‘canary in a coal mine’
* What’s next for interest rates?
* ‘The elephant in the room’ in New Zealand’s housing crisis
* Will Covid-19 just make rich New Zealanders richer?

“New Zealand is probably the only country that is even more housing-obsessed than Australia,” van Onselen says.

Obsessed with the fact that the housing market has swallowed up the economy, last year the value of New Zealand’s housing stock soared to nearly five times New Zealand’s GDP.

For context, Australia isn’t much better at just over four times, but the US has a housing stock valued at almost twice its GDP last year.

Any downturn in the housing market will be painful, even if prices remain 32% above their pre-pandemic level, as the Treasury predicts.

Van Onselen says people will get grumpy as property prices drop, even if those prices are higher than they were before the pandemic.

If you’re having trouble understanding why, van Onselen asks you to imagine going from an iPhone 3G to an iPhone 13 and then being forced to downgrade to an iPhone 5.

Or, in terms of housing, you got used to those thousands of dollars of net worth you had in your name, and now you’re not too happy that all that money has evaporated.

Van Onselen argues that the backlash from rising interest rates and falling house prices is already underway.


CoreLogic’s head of research, Nick Goodall, outlines impending factors that could drive house prices down and the significance of the upcoming election.

Labor had a double-digit lead over National in most polls until December, but that month was when the Real Estate Institute of New Zealand’s house price index fell. reverse.

Monthly increases in house prices have turned into declines. On the side of the Reserve Bank (RBNZ), the official exchange rate remained at 0.25% until October, when a cycle of rapid rate hikes began.

The cash rate was raised by 25 basis points to 0.5%, then by another 25 basis points in November to 0.75% and the OCR is now at 2%.

While this trickled down to bank mortgage rates, between March 2020 and November 2021 – over a year – the average floating mortgage rate never rose above 4.8%.

But in the six months since November, that average floating mortgage rate rose 15%, from 4.8% to 5.5%.

After the Covid-19 hit, the RBNZ had introduced an ultra-low official cash rate to ward off the prospect of a Covid-induced recession, along with other measures like a multi-billion dollar quantitative easing program and funding for initiative loans.

By the second half of 2020, it was clear that this was a mistake because Covid-19 was not like the global financial crisis or a confidence-shattering catastrophe like the 9/11 terrorist attacks.

Industries like tourism and hospitality struggled, but others were able to continue operating and the financial system did not seize up.

People were unable to spend on expensive items like vacations abroad, so they accumulated savings which they spent on goods or invested.

Some took advantage of these low interest rates and were willing to pay ever-higher prices for homes because they feared prices would go up even more if they didn’t.

Arguably, interest rates should have been raised to pre-pandemic levels much sooner, which would have cut the need for bigger rate hikes now.

Some commentators have argued that the Reserve Bank should have withdrawn the economic stimulus much sooner.

Getty Images

Some commentators have argued that the Reserve Bank should have withdrawn the economic stimulus much sooner.

The official exchange rate only reached its pre-pandemic level of 1% nearly two years after the country went into lockdown, and well after rising inflation took hold.

Quantitative easing did not end until the middle of last year and the Loan Funding Program – which effectively provides cheap credit to banks to lend to others – is still active.

Van Onselen is betting the sight of economic chaos overseas means the Reserve Bank of Australia won’t follow through on its interest rate hike plans, but sees the RBNZ’s strong language as an indicator that it will. will do – which could take $1,000 or more per month from household pay envelopes in higher mortgage repayments.

“It will bring your inflation down a bit, but at the cost of increased unemployment and a massive increase in the cost of living for everyone, and so much so that your consumption plummets.”

It’s worth remembering that property prices also began to fall in the months leading up to Helen Clark’s defeat in 2008.

Bill Clinton’s strategist James Carville once said that “it’s the economy, stupid” as the main thing Clinton should focus on to get elected. In a New Zealand context, you could change that to interest rates and property prices.

In other words, Prime Minister Jacinda Ardern’s political fate may well be in the hands of RBNZ Governor Adrian Orr.