Hunker down for Orr’s summer of Scrooge

Last year some New Zealanders were waiting to hear if they would be let out of their houses for summer. This year Kiwis will be trying to figure out if they can afford to stay in them.

Summer is a surprisingly important part of the political calendar, largely because it is a time when everybody is on holiday. Last year we had the push to vaccinate and open up so Aucklanders could enjoy a summer of festivals. Then we had the National Party change leaders in November because they wanted people to be talking about their new direction over the summer barbecue.

And if Reserve Bank governor Adrian Orr raises the official cash rate (OCR) by 75 basis points today it will be, in part, because there are no other scheduled monetary policy announcements till next year. However, he will be doing so at a time when faith in the wisdom of such hikes is starting to evaporate, largely on the back of international headlines about downturns in the United Kingdom, Europe, China and the United States.

Kiwibank chief economist Jarrod Kerr says 75% of China’s cities are recording big declines in house prices. And the pain is hitting home here too. Kerr is starting to get calls from friends and family asking him for advice on what they should do about mortgage bills that look likely to increase by a substantial amount.

The Reserve Bank is trying to clamp down on inflation by raising interest rates, making mortgages costlier and squeezing households into reducing their spending. ‘‘I’ve been saying to them: you should have spoken to me last year, now it’s too bloody late,’’ Kerr says.

‘‘I’m worried that we’re going to get a cash rate that is simply too high, but that is a risk that the Reserve Bank is willing to take. The way I see things is that the global growth story has deteriorated markedly in the last year, and we’re likely to see some pretty bad recessions out there.’’

However, he thinks the decision to raise the OCR by 75 points is still the most likely one, because once today’s announcement is out of the way we won’t hear from Orr for three months. This has implications for what he might decide – because we are coming into peak real estate season and his decision will have to hold right through it.

‘‘Most of the activity that happens in the housing market happens in spring, summer – this is when we [Kiwibank] write most of our business, and that doesn’t change each year. That’s the seasonal nature of our housing market.’’

Kerr says 60% of Kiwibank’s mortgages are set to roll over on to new rates over the next six months, which means a potentially stressful summer for some. Those refixing after a year at the old rates will see their mortgage interest costs double from 3% to 6% – all while the actual value of the asset they are paying for is in decline. ‘‘People who took out loans last year, a lot of them have taken them on the most attractive rate at the time – which was a one-year [rate].’’

But although Kerr favours a pause, he thinks Orr will raise rates, because not doing so could restimulate spending. ‘‘If they do 50 [points] you are risking a lowering of wholesale interest rates. I don’t think that’s a situation the Reserve Bank would be comfortable in seeing. They wouldn’t want that right now, they want to keep the heat on and then come back in February and reassess.’’

Even inflation hawks like Infometrics economist Brad Olsen seem to be having a few doubts. This time last year he was calling Orr ‘‘bird-brained’’ and ‘‘spineless’’ for not raising rates quickly enough. ‘‘They should definitely be hiking [rates] but I understand your point [that] even I sound a bit equivocal there and two-minded. You do very much risk, at this point, overcooking the response, but what choice do they have?’’

Olsen’s faith in these rate increases is largely being driven by the fact that prices are continuing to rise despite the hikes that have already been made. Plus, inflation expectations are still high, which means companies are continuing to raise prices despite the economic pain.

Summer has two sides of it: there is the beach, the sunshine, the flowers and the hope of a fresh start. Then there is the other side: anger from the sweltering heat and the ratcheting-up of social tensions, portrayed so vividly in Spike Lee movies like Do The Right Thing or Summer of Sam – both of which end in scenes of mass violence.

So which summer will Orr be hoping people have? A breezy carefree one or an angry one filled with people moaning about their mortgages? Orr will likely err on the side of the latter, but he very well might regret it.

So which summer will Orr be hoping people have? A breezy carefree one or an angry one filled with people moaning about their mortgages?

The talk over the barbies this summer is likely to be of mortgage pain. The Reserve Bank could ease that with a smaller-than-expected rise in interest rates, but it’s unlikely to do so, writes Dileepa Fonseka.