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Benje Patterson says many households will need to tighten their belts due to higher mortgage payments. The burden of this adjustment will be unevenly spread across the economy and fall on sectors which rely on discretionary expenditure

Business / opinion
Benje Patterson says many households will need to tighten their belts due to higher mortgage payments. The burden of this adjustment will be unevenly spread across the economy and fall on sectors which rely on discretionary expenditure
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By Benje Patterson*

Inflation has spiked to its highest annual level in over a decade, after recording its biggest quarterly lift in almost 35 years. Annual inflation is now running at 4.9% and the momentum in these pricing pressures is building.

The inflation boogeyman has raised his ugly head and left policymakers scrambling to explain and react. Even if inflation proves short-lived, the effects of these pricing pressures are real and are set to have a big impact on households’ discretionary spending.

The government has tried to downplay the situation, with the PM in one of her 1pm Q&As, dismissing the inflation result as being driven by temporary global supply-side factors.

Such comments are frustrating, as they neglect to consider that pricing pressures are occurring across all different types of goods and services.

It’s not just things which rely on international supply chains where we have rising prices. Statistics New Zealand data has shown that inflationary pressures are apparent for both tradeables (eg. imported goods) and non-tradeables (eg. a haircut).

Businesses are lifting prices for consumers in industries that have no direct relationship to the border. They are doing so because capacity challenges exist across many parts of the economy and consumer demand has remained strong enough to reassure businesspeople that they can protect their margin by lifting prices.

The real cost of living isn’t even measured by inflation

We don’t know how long inflation will persist for, but we do know that there is enough momentum to keep prices increasing strongly well into 2022 at the very least.

This higher inflation is squeezing the budgets of households across the country and is going to raise the stakes for wage bargaining over the year ahead. What’s more, the headline inflation in Statistics New Zealand’s traditional measures of consumer pricing downplay just how much household budgets are getting squeezed.

Of most concern to me are the effects of rising mortgage rates, which don’t even come into inflationary data because they relate to financial rather than consumer prices. There is a bit of circularity here, because mortgage rates are rising as markets anticipate that the Reserve Bank will try and take the heat out of inflation by continuing to lift its target interest rate.

Over the past two months, mortgage rates have risen by around 1.5 percentage points on average across any duration of fixed term. Commentators are suggesting that those average increases could end up rising to as much as 2.5% over the months ahead.

Many are downplaying these increases, saying that they would still leave mortgage rates at no more than 4% to 5%, which is well below historical averages. From a financial stability perspective, I agree there aren’t concerns, as stress testing of households when they apply for a mortgage usually tests a household’s ability to pay a mortgage for rates of up to around the 6% to 7%pa mark.

However, what is neglected in everyone’s discussions are not the financial stability concerns, rather it is the economic fallout which higher mortgage rates are having on households’ discretionary budgets. To paint you a picture, if we take a household with a $500,000 mortgage, then a 2% increase in mortgage rates represents an additional $10,000 of interest payments each year ($200 per week). For the average household, this would represent a sudden 12% decline in their budget, given that the average household had an after-tax annual income of $85,853 (according to Statistics New Zealand as at June 2020).

Not many households have had to refix their mortgage since rates began to rise, but most will over the year ahead given that one-year fixed rates have been the most popular fixed duration to choose. As more and more households are forced to refix their mortgage, the burden of higher mortgage rates will be felt more broadly through the economy.

In response to these higher mortgage expenses, many households will need to tighten their belts in other parts of their budget. The burden of this adjustment will be unevenly spread across the economy and fall on sectors which rely on discretionary expenditure. Sadly, these sectors include things like hospitality and entertainment, which have been some of the most affected by the fallout from Covid-19.

So before you are too quick to dismiss the inflationary boogeyman, spare a thought for what it has already meant for the real cost of living for people in your local area.


*Benje Patterson is an economist who is passionate about New Zealand’s regions. This article is used with permission, and was first published here.

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70 Comments

Everything is expensive except Debt (cheap like dirt .50).

So the intention is to make the whole generation indebted to their eyeballs?

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Global enslavement to endless debt. Must say its increasingly looking like that may be the master plan.

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Cheap consumer debt has allowed NZ to maintain our first-world lifestyle without high-value industries paying for it.

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It's our way now: live it up and pass the bill to the next generations.

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Nah.... the pmi has been great for years....who publishes it... let’s check??

 

we are going to be fine

 

 

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Well yeah.  Make debt as cheap as possible so the generation that voted against the user pays superannuation scheme of the 70's have the option to maximize their cash out bonus on property.  All at the expense of the young who need to fund the superannuation bill out of their PAYE.  

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Centuries ago there was the "Landlord" who owned all the land and the peasants worked for him.

Eventually the peasants became "middle class" and could afford their own land, see recent times.

Now there is the "Debt lord" aka Banks who own all the debt and the ones who think they are middle class work for them. They may own their home on paper but the real owners are the banks.

Own a million dollar 3 bedder in West Auckland, drive a Ford Ranger and have the latest Iphone 13. Think you're middle class. Na bro, they have fooled you, you are now a debt slave under the guise of a successful kiwi. Banks laughing all the way to the.. bank.

Sad really, what have we become. Burn it all down I say.

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I don't even have a Ford Ranger, I'm basically a serf :( 

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Define "Own". If you actually own it and not the bank, then sure your middle class, actually your doing way better than most in the middle class.

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Agree. I know more people than I can count off the top of my head that are living the dream....as you say big house, European cars, Ford Ranger utes (😂), lunches, dinners, clothes, bikes, holidays blah blah blah. But they also have something else, massive, eye watering debt.

But thats ok, because they believe this is 'normal' and that debt is nothing to worry about. Everyone is saying that interest rates aren't going to go up (oops), inflation will remain low (oops) and the property market will continue to increase at 20%+ p/a, creating more $$$ to spend.

So you are saying that under the 'Debt Lord' scenario these people are clearly...well screwed, but that means if you didn't subscribe to the "Look at me Mum, I'm rich (on paper)" mantra and lets say paid off all debt, saved every week, have a super fund, have some sensible investments that don't tear the future out from under our kids feet and live modestly, you are the winner??? I like it 👍 

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It’s always tempting to simplify history into grand narratives, but one historian I listened to recently argued that it was the great plagues that disrupted the feudal model, by pruning the inheritance trees of their idle and entitled landowner deadwood while also simultaneously removing the surplus of cheap indentured labourers, allowing a middle class to emerge. Make of that what you will.

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And this time around we locked down instead...

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Quarantine = drawing a border around the sick, to prevent them infecting the uninfected.

Cordon sanitaire = drawing a border around the uninfected, to keep the infected out. 
 

Lockdown …

 

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nice to see ppl awake 

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Raising interest rates will certainly contain inflation but the price increases are coming from a reduction in supply more than an increase in demand, so basically people will end up with less.

I think we need a bit of higher inflation to ease the debt pressures.

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That's not true. Covid has caused some level of supply chain disruption but as this years vaccine mandates being widely carried out globally. Supply has been improved, yet the inflation is getting worse. This is due to vast increased demand all around world as people coming out of lockdown with free money in their pockets. Particular in New Zealand, our housing price made a 30% gain from last year. This caused huge demand in building material as more property developers are flocking into new builds market. So we can not just keep downplaying it as a just supply issue anymore. The sooner we realise this the better we can deal with it. So totally agree with this article. We need to stop downplaying this inflation issue before it's too late. 

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The number of container ships waiting to be unloaded in China/USA & Europe and the shortage of HGV Truck drivers is a driver of supply delivery not necessarily a material shortage although the result is the same - a shortage,  and when demand exceeds supply prices respond and both ways so expect price drops when the supply chain operates as it did pre Covid unless demand remains in excess of supply or he Law of supply/demand is suspended.

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Company of Heroes is correct.  The inflation is due to pumping free money into the system. This free money is unearned - nothing was produced to 'create' it. Thus more cash chasing same limited supply

Mr Orr and his banking mates need to take ownership -  Instead everything else gets blamed, in particular covid. 

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Consumer spending is lagging behind the CPI, it's shortages driving the inflation.

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I don't agree, I would say insanely cheap debt and massive QE has driven up prices more than supply chain issues.

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Don't say this, as the govt & some buffoon wants to give the excuse for the supply chain for increasing land/property prices also. As if we have to import the land from China and there is a supply chain issue.

You cannot give more bad excuses to cover up the shit, as the way narrative building is floated by media these days.

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The idea that increased money supply is driving inflation is fanciful in normal times (the helicopter money theory has been disproven countless times) - never mind when we have such concrete evidence of price gauging and supply chain failure!  

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Don't forget the impact of her vaccine mandates. For example, 1300 health employees quit over the mandate - that's 1.5% of the workforce.  Sounds small but when you scale that over the economy, it will put meaningful pressure on both wages and costs. The economy was already running at red line RPM.

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Most of those are staff like cleaners, kitchen hands, HCAs rather than primary medical staff. It's a lot easier to fill those roles. These are the types of roles that pay near minimum wage anyway, so they would probably benefit from some wage inflation.

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That still reverberates up the chain. If your cleaners are being paid as much as your nurses, the nurses will demand a bigger pay rise. And so on it goes.

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And so they should, they're likely all underpaid.

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My daughter's preschool has lost 4 teachers.  Out of roughly 15 teachers.  Makes it a little hard for them to maintain teacher -> child ratios.  

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The irony is in the long term they're better off with a quality education, even risking Covid which affects most kids no more than a cold.

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Wondering how many of that 1.5% are near or planning retirement.  By not getting or postponing vaccination they have a chance of paid leave before dismissal.  For me the risk of getting a bad case of Covid would out weight it - maybe not 20 years ago.  What is typical turnover for health employees - maybe 5% pa ??

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Brilliant and oh so true article. Thank you.

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So our Goverment is borrrowing , we will have to sell the crown jewels and put up taxes to pay for our debt.

Go Cindy and Grunter

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Cindy and Grant are way ahead of this, agglomerating all of our scattered water providers into 4 viable commercial entities.  These will be prepackaged and ready for sale by 2025.  

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Nah.  Rawiri Waititi (edited) has them destined for the iwi.

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If Brock Landers has the sense or decency to delete his comment, then for the record he refers here to Rawiri Waititi as 'Scribble Face'. 

Are you happy to provide a platform for casual racism, or are you not capable of moderating your comments section - which is it Mr Chaston? Neither is a particularly good look for you or this website.

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Second this - healthy debate and discussion is a fundamental part of this site and community. Racism or discrimination is not. 

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pankers,

 'we will have to sell the crown jewels'  To which crown jewels are you referring? You may wish to consider that our Debt/GDP ratio is much lower than most other countries, so won't they be forced to sell their 'crown jewels' first?  Who is going to buy them?

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Putting up taxes in the forthcoming recession will not solve the debt  problem but the falling tax take and rising unemployment cost will increase debt under ardern & robbo and yes they should go but I dare not say were they should go but you may use you imagination.

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spare a thought for what it has already meant for the real cost of living for people in your local area.

That's the issue, no one cares about their fellow kiwis...local area or otherwise. We're all in a rat race.

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Bang on. My repayments will be going up at least $100 a week starting next month (~13% of my take home pay). I will obviously be cutting down on my discretionary spending. Have already canceled my expensive gym membership as my local club and downgraded to a budget snap fitness one. 

Its the small businesses that have already been hammered by covid that will suffer the most, as they provide more niche products and services, eg refer to the article about the 26,000+ businesses that have closed down in the last 8 months.

 

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But we are encouraged to spend at local businesses to support them.. ok Adrian. Keep spending.. the narrative they are required to push or it all falls apart.

Btw.. nothing wrong with Snap, been going there for years :D (well not lately).

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I was doing kickboxing classes/workouts with a new workout each day until about 6 then going to snap at 8.30 with my flatmate at one point. I find going to the standard gym you just end up doing the same thing day in day out and not changing up your exercises. But I will be able to make their 5.30 classes now :) 

I basically work to pay the mortgage, eat and exercise doing Kickboxing, squash, football, netball and the odd bit of rock climbing :P (and stack sats of course). 

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You must have a massive mortgage mate if your payments are going up $100 pw 

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$100 pw is about $5k per year. My daughter borrowed >$300k earlier this year at 2.2% for her first property - when the year is over, that will be maybe 3.7% or an extra 4.5K pa or $90pw.  Or worse. It was her first purchase; I did hint that paying more and fixing for 3 years could be a better idea.  However she only borrowed a little over $300k (was helped by the bank of Mum & Dad) - the bank set her borrowing limit to $700k - glad she bought well under that.

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450K   going from  about 2 or 2.25%  to 4% - = $100 a week ---    thats hardly massive -- and you may not get 4%  in 6 -9 months time -- maybe higher -

 

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$380k is chump change for a mortgage these days mate, especially a first home buyer. Current rate of 2.4% going to either 3.66% or closer to 4% depending on what I can secure.  

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Mortgage rates rises are just going to do what slipping wage rates and inflating living costs have been doing for years, except at a much faster rate. 

How high are petrol prices now vs. when we were being 'fleeced' again? The cost of getting up and going to work vs. what you can buy with your pay is getting wide at a far higher rate than anyone in power is prepared to admit, and they have no answers. 

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This.....was all so avoidable.

Had Household appetites for ever more mortgage debt been reigned in 15 years ago; 10 - or as a last resort, 2, then there might be adequate free cashflow to service unexpected expenditure rises.

But they weren't, and they don't.

Now we have the worst of all Worlds. A rising cost of everything, and no way to contain the coming carnage.

Something has to give, and it's going to hurt.

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I find it unbelievable that the RBNZ could pretend that years of recklessly loose monetary policy would not have caused inflation in the longer run. Now that the horse has bolted, it is going to be very painful for the economy to readjust, as significantly tighter monetary conditions will be needed for a significant amount of time. Interest rates normalization, well overdue, is finally coming. The signs from main swap markets overseas are also pointing towards a general tightening. Be ready for mortgage rates not seen in years. 

The RBNZ will be forced to raise rates until mortgage rates reach between 6 and 7%. The only reason why the can't and they won't go any higher is that this would be catastrophic for the housing Ponzi. In any case, I would not touch with a barge pole any type of residential housing speculation, given the current and prospective conditions. 

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friends own a popular Wellington  restaurant- they say in the last 6 weeks (ie really since Mortgage rates started rising) a bit of a downturn in revenue. They say they are still doing the same number of heads each week- in fact probably slightly more - but the spend per head is down. Most people instead of 3 courses are having just  1 or 2 courses, selling less of their expensive meals and more of the mid priced/ low priced products and they are selling less drinks and dessert overall.

They have also noticed a demographic change- a lot less families and more older people dining out - which would reflect families tightening their belt on eating out and retirees who have higher interest on their term deposits now having a little more money to spend

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"Don’t downplay the inflation boogeyman"

We all know that inflation is not temporary or may be they are hoping that once inflation jumps from $150 to $105 than from $105 to $110 technically is fall and than from $110 to $116 is also a fall...this is playing around whereas the average family is screwed.

Temporary Inflation was started by FED and parroted by RBNZ to avoid being question by kicking the tin.

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You often make generalisations like "we all know". No we don't, different people have different opinions, this "we all know" is even more silly when it refers to a prediction. 

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As rising mortgage rates bite into consumer spending-as they are bound to- and we see a gradual easing of supply chain issues, will inflationary pressures not start to ease?

Even if they do, I expect the RB to continue to gradually raise the OCR to a more normal level, say 3%, over the next 2/3 years.

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There is a bit of circularity here, because mortgage rates are rising as markets anticipate that the Reserve Bank will try and take the heat out of inflation by continuing to lift its target interest rate

Doesn't this sentence tell you everything that is wrong with monetary policy? Let's break this down...

  • Inflation is being driven by: (a) supply chain constraints abroad, which have increased input costs (shipping, oil, etc) that have a broad impact on prices in NZ; and (b) our ridiculously inflated housing market
  • The default monetary policy response to this 'inflation' is to increase interest rates, which slows house price growth (a bit) by taking disposable income away from middle class spenders. However, to actually reduce house prices would require interest rates to be at election-losing levels and, increased costs of borrowing put upwards pressure on rents as landlords deal with higher costs of borrowing (thus creating inflation)
  • Demand for goods and services might drop a bit because mortgagees and renters have less money to spend - but this will make ZERO difference to prices, because it doesn't change the overseas determined input costs
  • So we get marginal increases to interest rates, house price growth slows, but rents go up, and we lose some demand out of the economy and this leads to job losses (and less demand)
  • It is a recipe for disaster because we are trying to control a complex system with a single, impotent monetary lever

 

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Yes JF. A potential recipe of disaster. I frame things a different way (see below). Not sure I agree with your "drop a bit" in consumer demand as h'holds are already living paycheck to paycheck and have very little in the way of savings (right across the income spectrum). The consumer spending component is crucial and I think it's kind of an obvious trigger point that the 'smart people' are not really thinking about. 

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Fair point on the 'drop a bit' - although there is considerable headroom on borrowing costs as a % of disposable income compared to historic trends. I would also expect people with equity to lengthen their loan term rather than take a hit to quality of life. I guess we will find out soon enough!    

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In order to understand how monetary policy works, you can not just view it from a business or property owner's perspective, you've been talking about cost a lot. In the economical scenario, yes, there is cost involved when it comes to pricing. But price is ultimately determined by supply and demand, we call it market. If costs are covered all the time, then it's impossible for businesses to make a loss or go bankrupt. Monetary policy is not meant to deal with costs. It doesn't need to and it can not. But monetary policy can effectively deal with price and inflation by pulling the demand down to cool down a overheated market.

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That doesn't really make sense. One person's 'cost' is another person's 'price'. There is sod all evidence that monetary policy works to be fair. In 20 years time, we will look back in amazement and dismay that people took it seriously.

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So interest rates are returning to levels they were a year or so ago, and it’s a calamity? Mortgage holders were lucky to get a significant reduction in their outgoings via the slashing of interest rates, combined with one hell of an equity boost. Non-homeowners got jack shit.

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This is a much bigger problem than what the 'smart people' are NOT talking about it: decreased discretionary spend into the consumer economy. 

Now, compared to other countries, NZ and Australia, has a plethora of 'nice to have' FMCG products and service businesses (wouldn't surprise me if NZ has more latte-serving businesses per capita than most other countries). NZ supermarkets have greater assortment of FMCG products than countries such as Japan. 

So much of the economy relies on this discretionary spend. And the 'inconvenient truth' is possibly not that the bubble's wealth effect is not as powerful as the the inflation devil.

Looks to me like a perfect storm and for a potential economic catastrophe starting from where the 'smart people' are not looking--the 'nice to have' sector of the economy. Remember, these people pay mortgages, pay supply chain providers, pay incomes, etc. Do I want to buy their business in this environment? Hell no. People are not expecting that the value of their businesses are potential below cost. Not good. 

Now, what if this DGM scenario feeds into the bubble itself? You then potentially have a deflationary spiral.    

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this government does not understand inflation -- unless its to do with its Ego or sense of its Achievements   both of which are running out of control

 

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They had better be fast learners because inflation is going ballistic. There are things you can ignore for a short period of time and then "transitionary" suddenly isn't and its a BIG problem instead. The next announcement on the 24th November will be the most anticipated watch for the whole year. 

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This inflation is NOT going away ....it's the result of all this "money printing" around the world (which has to be paid back) chasing a limited supply of goods, while input costs are rising as well. Then you have "scarcity" of goods, with the distribution chains "hampered" right now.......this is the catalyst for the "wage -  cost spiral" However, I can imagine the reaction of employers of raising salaries to keep up  - we can't afford it ! 

So demand will fall away, profits will decrease  - while prices continue to rise ......wages/salaries will stay the same ......then rents won't be paid .....people will lose their "poorly paid" jobs ....companies will fold ....recession to follow .....leading into a depression.....

BUT BUT BUT I hear the Labour Party scream....we have the answer !  .....250,000 more migrants will do the trick...who cares if there is not enough infrastructure/ housing etc already .....they'll work for $20 an hour and think it's heaven, while filtering up the "corporate ladder" ....employers are happy because they are making profits again .....and they have people buying their stuff again !! 

Perfect solution .......but for WHOM ??? 

 

 

 

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Wage inflation is benign, even in the 'diffrunt' economies of NZ and Australia. 

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I agree. I'm just waiting for Labour to open the flood gates and let the 65,000 per year for the last couple of years that missed out to all pour in at once. Nothing like an additional 150,000 people or so to spice up the economy.

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Yes and No. Immigration is an easy way to pump GDP figures and for slave labor. There's a big trade off. 

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Do you think the govt cares about the trade off? They haven't seemed to thus far.

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A great article that people should definitely heed.  

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The article presents a good gentle warning.

However mortgage interest repayments will not rise ~~~~

If you had an existing mortgage that refixed in the last 18 months at an amazing low rate, you very likely kept your repayments steady at that time, listening to all the advice out there. Knock out that mortgage quickly. When you refix at a higher rate soon, you have the room to keep repayments steady.

If you only have recently acquired a mortage - um, you knew very well you were jumping in at the lowest interest rates of all time and that increases were certain, eventually. Sorry.

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Looks like RBNZ has no runway.

Keep flying and refuel mid air; or take the losing bet in an attempt to land the plane.

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If we are in massive debt as a country, then China has some strategies for us to pay our debt. 

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