Interest Rates are increasing: What does this mean for the economy and housing market?

CPI and NZ Economy

We’re well into 2017 and I think it’s fair to say that, by and large, the economy has continued on the same upward trajectory that many of us predicted. With new figures from economic analysts Infometrics projecting GDP growth of more than 3 percent per annum to June 2019, things are looking good – great, even – but is it going to last forever?

Almost certainly not.


The writing’s on the wall

I want to preempt this by saying that we’re probably not headed for economic armageddon so much as a period of moderation. New Zealand has enjoyed 8 consecutive years of expansion; it’s only natural that we start to see some slowdown at around this point.

With that being said, historically our economy (we’re looking at you in particular, New Zealand housing market!) is guilty of pushing its luck when times are good and failing to take measures to reduce the fallout when things inevitably turn sour.

The result?

Years of economic stagnation as the country struggles to find its feet again.

This time around, however, things are slightly different. Perhaps learning from our past mistakes, various organisations and official bodies have begun taking prudential measures to minimise the impending fallout.

For example, at the Reserve Bank of New Zealand’s (RBNZ) behest, most of the major banks have tightened up LVR lending criteria in an effort to reign in house prices. At the same time, interest rates on fixed-rate home loans have started climbing, while the consumers price index (CPI) is also beginning to show signs of upward movement.

This latter point is a particularly important indicator of the health of the economy and one that I want to explore in more detail, as it can have an enormous impact on mortgages and house prices, as well as the wider economy.


A brief introduction to the CPI

The CPI is New Zealand’s best measure of inflation (though it’s important to note that it’s used only as a measure of inflation faced by households, and doesn’t necessarily reflect wider economic conditions). It is calculated by evaluating the rate of price change of services and goods purchased by households throughout the country.

When the cost of these products goes up, the CPI will rise; if they get cheaper, the CPI declines. Tracking the prices of almost 700 products spread across 11 groups, the CPI is a reasonably accurate indicator of the cost of living for a typical consumer.


CPI on the rise

As you might have guessed, the CPI is indeed on the rise. According to figures collated by Statistics New Zealand, the CPI saw a quarterly increase of 0.4 percent and was up 1.3 percent in December compared with the same time period a year earlier.

In regards to the annual figures, higher housing and household utility prices were largely responsible for the increase, though these were slightly offset by a drop in transport costs. Year on year, tradables fell just 0.1 percent while non-tradables jumped 2.4 percent.

In my opinion, the most noteworthy figures are related to housing and utilities. The price of owning a home rose 6.5 percent annually, with the purchase of newly built houses (excluding land) up a whopping 8.2 percent in Auckland.

Of course, these figures may not come as much of a surprise to you – people from all backgrounds and across all industries will have felt the pinch in recent months.

The real question is: what does a rising CPI actually mean?


The effect of the CPI on the property market

Among other things, the CPI (in conjunction with other indices) is used to help set monetary policies, the most important of which is the Official Cash Rate (OCR). Currently sitting at 1.75 percent, the OCR has an enormous influence on just about every aspect of the New Zealand economy – including the property market.

A rising CPI means that households have less money to spend, which in turn puts pressure on mortgagees to meet their financial obligations. From a wider perspective, if the CPI were to continue to rise over the long term, it could potentially convince the RBNZ to increase the OCR, which could spill over to your mortgage and push the cost of your repayments up. While 1-2 mortgage year rates are probably immune for the time being, variable-rate home loans could well see rate hikes in the foreseeable future.

If you’re concerned about how the rising Interest Rates may affect you, do feel free to make an appointment for a chat and a coffee.