Waiting to buy a house may pay off

QOur daughter is aged 26 and living in Wellington. She and her partner are hoping to buy their first home in the next few years. She has $36,000 in her KiwiSaver and another $24,000 in the bank. She has always been a good saver. Last year property prices went through the roof and we encouraged her to wait. Now this year it looks like interest rates hikes are going to upset her plans. Is there anything we as consumers can do to slow the rate of interest rate rises?

AAt the start of the Covid pandemic, interest rates came down to a record low of 0.25 per cent. At that time, it was believed that the negative economic implications of the pandemic would require significant monetary stimulus.

As it turned out, the success of the first lockdown and government financial support resulted in a booming local economy.

An unintended outcome of record low interest rates was rocketing house prices, as borrowers could service bigger and bigger mortgages.

Rising house prices also drove up rents putting many lower income households into poverty. The Government has tried to deal with this undesirable situation with mixed results.

The Reserve Bank of New Zealand (RBNZ) uses monetary policy to maintain price stability. The RBNZ’s current remit is to keep inflation between 1 and 3 per cent on average over the medium term, and support maximum sustainable employment. Currently consumer price inflation is high, both in New Zealand and globally. Inflation pressures are mostly due to the recent recovery in global demand running up against severe supply shortages and trade disruption. Rising energy and food prices resulting from the Russian invasion of Ukraine have added to the economic disruptions caused by the pandemic. Global consumer price inflation is well above most central banks’ targets, not just here in New Zealand.

The RBNZ implements monetary policy by setting the Official Cash Rate (OCR) which is reviewed seven times a year.

The theory is that higher interest rates will encourage consumers to save rather than spend while lower interest rates will encourage consumers to spend either money they have — or money they are able to borrow at the lower rates.

On April 13, the RBNZ Monetary Policy Committee increased the Official Cash Rate by 0.50 per cent to 1.5 per cent.

At the time of this review, the committee discussed developments affecting the outlook for monetary policy. In their report they noted that “Capacity pressures are apparent across a wide range of domestic indicators. In particular labour shortages remain heightened, impinging on domestic economic output. Nominal wages are rising in response to these shortages, as would be expected. However, the increasing cost of living is putting pressure on household budgets. Consumer confidence has been declining as domestic price pressures are outpacing nominal household income growth.”

Rising costs are a problem globally, not just in New Zealand. Taking money out of household budgets by raising the OCR will send more people into poverty. Some may be forced to sell their homes if they can’t service their mortgages when they are reset at much higher rates.

The RBNZ must balance the need to control inflation with the risks of putting too much pressure on households. They also have to be mindful that it may take months for the higher OCR to have the desired effect.

Your daughter may find that there are more houses in her price bracket once the interest rate rises have had time to work through the economy — this could take nine to 18 months.

You as an individual can’t do much to influence the RBNZ’s decisions, except save rather than spend on discretionary items. With the cost of everything from groceries to building supplies rising, many of us are tightening our belts now.

■ Shelley Hanna is the communications manager with Peak Portfolio Management Ltd which is a financial advice provider licensed by the Financial Markets Authority. Disclosure information is available at www.peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to shelley. hanna@peak.net.nz