New Zealand accepts house price falls and recession to protect the Kiwi Dollar

by Shaun Richards

Today I am returning to s subject which was rather exercising me on Saturday evening. To be precise it was 71 minutes of pain followed by 9 minutes of delight as I watched England play the All Blacks at rugby. It was a curious way to end up at a draw but now in a rugby obsessed country we see this.

The Monetary Policy Committee today increased
the Official Cash Rate (OCR) from 3.5 percent to
4.25 percent.

Although that has become something of the recent standard for interest-rate rises it is in fact a record for the Reserve Bank of New Zealand. Such was their concern they considered setting an even clearer record for a rise.

The Committee gave consideration to an increase in
the OCR of 75 or 100 basis points. On the balance of risks, the Committee agreed that a 75 basis point increase was appropriate at this meeting.

A large driver of this was probably simply that as I have pointed out many times central bankers are pack animals and thus 0.75% was likely to win out. Also this brings in my generic critique that you should start with larger increases and then fine-tune so they have got their speed of travel wrong. This is especially awkward when you start too late. Also it is an issue that central banks were made independent to avoid, and has thus failed.


We get our first clue about trouble here as we repeat the pack animal behaviour.

The Committee remains
resolute in achieving the Monetary Policy Remit.

In terms of further detail we are told this.

The Committee observed that consumer price inflation in
New Zealand in the September quarter was significantly stronger than expected. Measures of core inflation continued to rise and price pressures broadened.

If we switch to the numbers we see this.

The consumers price index increased 7.2 percent annually in the September 2022 quarter, Stats NZ said today.

The 7.2 percent increase follows an annual increase of 7.3 percent in the June 2022 quarter, and an annual increase of 6.9 percent in the March 2022 quarter.

So in terms of context it was 4.2% above the upper band for the target and 5,2% above the mid-range. Also whilst 0.1% is within the margin of error it was a drop which makes the apparent central banking panic a little curious. Perhaps the more recent update on food inflation gave them a nudge.

Food prices were 10.1 percent higher in October 2022 compared with October 2021, Stats NZ said today.

“This was the highest annual increase since November 2008,” consumer prices senior manager Nicola Growden said.

It would be rather awkward if the RBNZ was responding to what central banks have argued is a “non-core” item for many years, but maybe they were hoping it would not be spotted.

On the other side of the coin last Thursday’s producer price numbers showed a slowing of inflationary pressure.

Producer output and input prices have increased in the September 2022 quarter, Stats NZ said today.

In the September 2022 quarter prices received by producers of goods and services (outputs) increased 1.6 percent compared with the June 2022 quarter. Prices paid by producers of goods and services (inputs) increased 0.8 percent over the same period.

So the output numbers have gone 2.6%, 2,4% and now 1.6% which shows signs of a fading. That is reinforced by the input numbers which after a couple of 3 percent plus numbers has fallen to 0.8% suggesting a weaker output number next time around. Perhaps they feel that the fall in energy prices will not last.

Offsetting this was a fall of 23.2 percent in prices paid by producers in the electricity and gas supply industry.

That is awkward because it would mean that their new enthusiasm for higher interest-rate rises would be due to food and energy which are for central bankers non-core. Could we have a bonfire of the research papers?


Those who argue that central banks also target wage growth will get some food for thought from this.

Average ordinary hourly earnings, as measured by the Quarterly Employment Survey (QES), increased to $37.86, an annual increase of $2.61 or 7.4 percent.

“This is the largest annual rise in ordinary time hourly earnings since this series began in 1989,” international and business performance statistics senior manager Darren Allan said.

Although less so from this.

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The LCI’s all salary and wage rates (including overtime) index rose by 3.7 percent, the second highest annual increase since the series began in 1993.

As to the gap well this is part of it.

The LCI’s primary measure of wage inflation adjusts for changes in employment quality. Therefore, employees receiving promotions or moving to different roles do not affect this measure of wage inflation.

Without it the LCI would have been 5.3%.

House Prices

Here we have seen this.

The REINZ House Price Index (HPI) for New Zealand, which measures the changing value of residential
property nationwide, showed an annual decrease of 10.9% from 4,200 in October 2021 to 3,744 — down
12.4% from its peak in November 2021.
New Zealand saw a 0.2% increase in terms of HPI month-on-month movement.

Which the central bank puts like this.

Although New Zealand house prices have now declined by about 11 percent since the November 2021 peak, household
wealth in the June 2022 quarter was still 15 percent higher than at the end of 2020.

So as they would consider it we still have wealth effects from past house price rises. A chill must have gone down their collective spines when they calculated this.

The central projection assumes that house prices will decline by 20 percent in total from the November 2021 peak.

In terms of affordability things now will be tighter than the numbers below which are from the Financial Stability Report of the 2nd of this month.

Among households with mortgages, the average percentage
of disposable income dedicated to debt servicing is expected to rise from a recent low of 9 percent to 20 percent, based
on current mortgage rates.

Some will be particularly hard hit.

. Repayment
increases will be particularly significant for
many households that first borrowed in the
past two years.

That will be especially tough for these.

The decline in prices means that some
borrowers who purchased houses in 2021
are now in negative equity, meaning their
mortgages are larger than the current market
value of their property.

I note that they had used 6% mortgages rates as a benchmark ( presumably thinking we would not see that). Whereas according to the NZ Herald it is arriving for some.

Based on a current average fixed mortgage rate across the stock of loans of 3.8 per cent, the fortnightly mortgage repayment for every $100,000 of debt (30-year term) is around $215 – or roughly $5590 per year, Davidson noted.

“But somebody then refinancing to a current rate of 6 per cent would see that repayment jump by $1602 per year – or more than $8000 if they had a $500,000 loan.


The RBNZ deserves some credit for acting earlier than many of its peers. Although that makes today’s decision a little more curious as its actions back then should be starting to impact. I think that we return to the issue of the US Dollar and matching the moves of the Federal Reserve.

In relation to New Zealand’s goods exports, members observed that a lower New Zealand dollar is
currently mitigating the impact of recent declines in international commodity prices.

Now they find themselves adjusting monetary policy for the external component and are willing to sacrifice the Holy Grail of higher house prices. Of course having previously pumped them up they will be leaving more than a few with a much worse cost of living situation and some with negative equity. Speaking of negative equity the RNBZ will have that as well as it will be paying 4.25% on its bond holdings.

These initiatives have enlarged our balance sheet from its December 2019 (pre-COVID-19) level of $24.60bn to $97.89bn at the end of October 2022.

Still at least their inflation-linked bonds will be doing well. What a masterpiece of investment planning!

Returning to the economy things again get awkward because the consequence of them “saving” the economy in the pandemic is apparently this.

Members noted that a reduction in aggregate demand is projected to cause GDP in the New Zealand economy to temporarily contract by around 1% from 2023.

Ah temporarily……


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