'Gale force' economic warning: what 1% rise in mortgage rates would mean

Mortgage lending has “gone bananas”, leaving Kiwis sitting on a massive pile of debt with a low interest rate on it, ANZ chief economist Sharon Zollner has warned.

Now, just a 1 per cent rise in mortgage rates would slash 5 per cent off the disposable income of Aucklanders, she said.

The latter figure would be about 3 per cent in the rest of New Zealand, she said.

Auckland’s exposure to a rise in inflation expectations and interest rates has been rammed home by the country'’s biggest bank.
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Auckland’s exposure to a rise in inflation expectations and interest rates has been rammed home by the country'’s biggest bank.

Zollner described that as a “gale-force headwind warning”.

Her stark assessment of the risks that are abounding in the Covid economy capped a day of warnings delivered by bankers and economists at the NZ Economic Forum in Hamilton.

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Earlier, Waikato University research fellow Leo Krippner told the conference the country probably had the best environment for the emergence of high inflation “since the 1970s”.

That was because of the current very strong monetary and fiscal stimulus, combined with supply disruptions created by Covid, and changes in the labour market, he said.

Reserve Bank governor Adrian Orr told the conference people should be very concerned about inflated asset prices, with “big questions marks” over sharemarket and house prices.

And ASB chief executive Vittoria Shortt​ said it was closely watching worrying signs that more customers were running down their “rainy day” funds to less than $1000.

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

Mortgage lending has “gone bananas”, ANZ's top economist says.
123RF
Mortgage lending has “gone bananas”, ANZ's top economist says.

“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.”

It was absolutely plausible inflation might stay low for a very long period “and indeed it is our forecast”, she said.

“Extreme valuations don’t mean that things will end any time soon.

“It just means they might be ‘quite exciting’ when they do.”

ANZ chief economist Sharon Zollner says ‘economics’ needs to change, but there are some basic facts.
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ANZ chief economist Sharon Zollner says ‘economics’ needs to change, but there are some basic facts.

While there was a view that economics needed to change, there were “some basic facts”, she said.

They included that debt made people vulnerable, a problem deferred was not a problem solved, and “if something is unsustainable, it will end”.

“It is not just houses in New Zealand, this is a global issue,” she said.

“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.”

The message for 20 years had been “central banks have got your back”, Zollner said.

“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.”

Inflation pressures and expectations were rising at levels that were “probably fine”, she said.

“But the interesting question is, what if they don’t stop?

Covid had not proven to be a particularly deflationary shock, she said.

“But central banks have responded to it as if it was ... and you have got to ask, ‘can they or will they change course promptly if they are required to?’

“And they are actually telling people they won’t.”