A new survey has found around 3 percent of New Zealand mortgage holders could be facing the very real possibility of being forced to sell a property over the next year as a result of higher interest rates.

The latest banking monitor survey, conducted by research firm Horizon, estimated that 3 percent equates to 43,000 borrowers with existing home loans.

Additionally, a further 70 percent of the estimated 1.34 million people who hold a bank mortgage are concerned they may not be able to afford payments when they renew at current or even higher fixed rates.

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The Horizon report, which surveyed 1,091 adult respondents between June 8-12, noted that 84 percent of mortgage holders surveyed were on a fixed rate, with 30 percent on floating and a further 14 percent on a combination of both.

Those aged between 35-54 were the most likely to be on a purely fixed rate, at 89 percent, while younger borrowers had the highest level of floating-only rates, at 36 percent.

Asked if they thought they might have to sell a residential property in the next 12 months because of higher interest rates, 3 percent thought they’d “definitely” have to sell, while 8 percent felt they’d “likely” have to sell – the equivalent of another 100,000 mortgage holders.

However, 57 percent respondents said a sale was either “most unlikely” or they “definitely wouldn’t be selling”.  The remainder didn’t provide a response or were unsure.

RBNZ set to pause on further rate hikes

The Reserve Bank looks set to take a pause on further rate hikes when it announces its latest Monetary Policy Review this Wednesday. For borrowers, it’s an outcome that can’t come soon enough.

This week’s decision will mark a major inflection point for the central bank, after what has been a relentless hiking cycle that began in October 2021.

Back then, the OCR stood at just 0.25 percent. A hefty 525 basis points of tightening and 12 interest rate hikes later, the New Zealand economy (like most others around the world) has largely defied the numerous predictions of economic carnage and mortgage holders facing significant financial distress.

Consumers have largely kept spending, business confidence hasn’t collapsed to the extent that markets had been expecting, and the economy has demonstrated a surprising resilience, underpinned by an enduring record low unemployment rate.

But as Kiwibank chief economist Jarrod Kerr pointed out in a recent note, the biggest development over the last six months has occurred at the border, where a surge in migration and a dramatic bounce in student and tourist numbers have been New Zealand’s economic saviours.

“Aotearoa is, and will always be, an attractive place to come for work, study or play. The bounce in student and tourist numbers will boost our service exports. And there’s plenty of upside. We’re still working our way back to pre-Covid levels.”

More foreign workers are not only plugging the gaps in what has been a very tight labour force, they are also reasserting downward pressure on wage growth, but at the same time boosting demand for everything, including housing.

Tourism has also provided an additional economic boost, with visitor numbers now back to around 70 percent of pre-Covid levels. There is growing optimism in the sector that these levels will soon be eclipsed – and that this will deliver further impetus for the economy in the near term.

Is the economy about to turn south?

Despite the better-than-expected macro environment, economists as well as the Reserve Bank do expect a gradual rise in the unemployment rate over the rest of this year and beyond, as the economy continues to cool. However the conditions for a substantial rise in the jobless numbers don’t appear to be in place – at least not just yet.

“It remains to be seen whether the gentler slowdown that we’re currently facing will be enough to fully break the back of inflation.”
– Michael Gordon, Westpac

In its May Monetary Policy Statement, the Reserve Bank was projecting only a slight rise in the unemployment rate to 3.5 percent for the June quarter, but then it expects a more rapid rise to 4.1 percent in the September quarter and 4.6 percent by year-end as recent interest rate hikes really begin to bite and the 50 percent of mortgages left on low interest rates fully roll over.

As Westpac senior economist Michael Gordon points out, that’s more akin to the pace of increase we saw in 1998 or in 2009, when the New Zealand economy was deep into recession and employment was falling outright.

“It remains to be seen whether the gentler slowdown that we’re currently facing will be enough to fully break the back of inflation.”

In other words, the hard part might still be ahead of us and that has the potential to make the second half of the year much more challenging than the first, particularly if central banks are forced to continue hiking interest rates or keeping them elevated for longer than current forecasts.

However, the fact that both household and business surveys show that inflation expectations for the year ahead have eased substantially from their earlier highs, will give the RBNZ comfort that a pause, for now, is warranted.

While shipping costs have eased and a range of commodity prices, including oil, are lower than they were a year ago, the real test will be whether the ‘core’ components of inflation will also come down as readily, given that to date, they have proven to be surprisingly stubborn both here and in many other parts of the world.

So the question everyone will be wanting to have answered this Wednesday will be: is this just a temporary pause or a more permanent one?

Without the benefit of a media conference to prod the Reserve Bank, it may well remain mum on the question ahead of next week’s Q2 consumer price index (CPI) data, which will be key to determining the outlook for interest rates.

As this week’s stronger-than-expected private sector employment and wage data in the US demonstrated, there’s still plenty of fire power and continued resilience in the world’s largest economy keeping the inflation flame burning brightly, and leaving the Federal Reserve no option but to hike a further 25 basis points later this month, despite pausing in June (see below).

The message the world’s top central bankers delivered late last month could not have been clearer. Bank of England governor Andrew Bailey, and his US and eurozone counterparts Jay Powell and Christine Lagarde, all insisted that high inflation — and high interest rates — would endure.

While Reserve Bank Governor Adrian Orr may have called time on further interest rate hikes, unfortunately this doesn’t come with an implicit guarantee. ‘Data dependency’ has become the accepted mantra guiding central bank decisions.

For borrowers, it may be a case of enjoying the pause while it lasts.

Market volatility continues to roil investors

The NZ sharemarket turned on a dazzling display of resilience on Friday in the face of surprisingly strong employment data in the US that saw global markets weaken at the prospect of further rate hikes.

After losing more than 140 points in the morning session, the NZX50 managed to recover all of its earlier losses later in the day to close up 21 points at 11,980, ending the week with a gain of 0.5 percent and in doing so proved to be something on an outlier amongst global equity markets.

Shares in Auckland Airport traded as low as $8.20 at one point on Friday, only to close at $8.38, while Fletcher Building shares also fell to an intraday low of $5.30 but recovered all their earlier losses to close up 1c at $5.48 as investors decided the selloff had been overdone.

Across the Tasman, Australia’s ASX200 fell 2.2 percent for the week, its biggest weekly fall of the year, while Europe’s Stoxx 600 index closed down 2.3 percent on Thursday, its biggest one-day drop since March, as the yield on the two-year US Treasury note — which tracks interest rate expectations — reached its highest level since 2007. In the US, the benchmark S&P500 index fell 1.2 percent for the week.

“The global economy will break eventually, and the higher rates go, the bigger the cracks will be”
– Mike Riddell, Allianz 

Stocks and bonds sold off sharply across the world as US borrowing costs touched a 16-year high, following strong jobs figures that intensified expectations of further rate rises by the Federal Reserve.

The US gained 497,000 private sector jobs last month — roughly double economists’ expectations and the biggest rise in more than a year — according to data from ADP Research Institute, with big increases in the hospitality and leisure sectors, as well as in construction and transportation.

“The global economy will break eventually, and the higher rates go, the bigger the cracks will be,” Mike Riddell, a bond fund portfolio manager at Allianz told the Financial Times.

As the two-year US Treasury hit 5.12 percent, the benchmark 10-year surged more than 6 percent, its biggest weekly advance this year, to reach 4.07 percent, as the sell-off by investors pushed yields up sharply.

After recently falling below pre-Covid levels, the closely watched Vix volatility index, popularly known as “Wall Street’s fear gauge”, jumped to a high of 17.1, with investors fretting that a prolonged period of high borrowing costs could soon weigh on the US economy.

The shifts underscore a growing consensus that the US Federal Reserve will soon be forced to resume rate rises after pausing its tightening campaign in June for the first time in more than a year.

Lorie Logan, president of the Dallas Fed, called for an immediate resumption.

“If we lose ground in our effort to restore price stability, we will need to do more later to catch up,” she warned. “We have already had a fair amount of time to see the overall effects of monetary tightening.”

The central bank has raised the federal funds rate more than 5 percentage points since early 2022. But according to minutes released last week from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said “additional increases” in the Fed’s benchmark interest rate would be “appropriate” – and that had markets rattled.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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