Economist warns of impact of 1% rise in mortgage rates

by Roxanne Libatique05 Mar 2021

Kiwis are already neck-deep in debt due to current mortgage rates and other related factors. So what would happen if the rates increased by an additional 1%?

OneRoof’s latest report found that buyers, especially those seeking to buy their first home, were hit the hardest by rising house prices as they needed to save more to apply for a mortgage successfully. New Zealand’s deposit requirements jumped by $28,000 to $153,000 in the last 12 months – and first-home buyers have it worse, with the amount they need to save growing $43,000 over the same period to $171,000.

ANZ chief economist Sharon Zollner warned that even only a 1% increase in mortgage rates would slash 5% off Aucklanders’ disposable income and around 3% in the rest of New Zealand, reported Stuff.

Waikato University research fellow Leo Krippner, who attended the NZ Economic Forum in Hamilton, said the country probably has the best environment for the emergence of high inflation “since the 1970s” because of the current monetary and fiscal stimulus, supply disruptions created by the COVID-19 pandemic, and changes in the labour market.

Zollner questioned whether policymakers were setting things up for “a rerun of some of the mistakes made in the past.”

“I think it is probably worth asking now if monetary policy is truly smoothing the business cycle if you include the next recession in your definition of that business cycle,” she said, as reported by Stuff.

“It was absolutely plausible inflation might stay low for a very long period, and indeed it is our forecast,” she continued. “Extreme valuations don’t mean that things will end any time soon. It just means they might be ‘quite exciting’ when they do.”

While many economists and experts believe that economics needed to change, Zollner said there were “basic facts.” For example, debt made people vulnerable, and “if something is unsustainable, it will end.”

“It is not just houses in New Zealand. This is a global issue,” she continued. “If you misprice something for a long time, people will demand the wrong amount of it. And I would say ‘risk’ has been mispriced deliberately for a very long time.

“People say to me ‘the Fed won’t let equities fall’ or ‘the Reserve Bank won’t let house prices fall’, as if central banks are omnipotent, and that fails the ‘too good to be true’ test. One thing that could demonstrate that is the rise of inflation.”

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