The average mortgage cost for Kiwis is likely to continue rising, reaching 5.5% by early 2024, ASB economists say.
And they say that even if the Reserve Bank (RBNZ) cuts the official cash rate in 2024, the average cost of borrowing is unlikely to fall until 2025.
ASB Senior Economist Mark Smith has a detailed crunch on the cost of living of householdswho joins one he did earlier in the year.
In the latest update, Smith estimates that households could face a weekly cost of living increase of about $110 through June 2023. However, he notes that household incomes are also rising sharply.
Regarding mortgages and debt servicing, Smith says those costs “have to keep going.”
The OCR is currently 3.0%. The ASB recently raised its forecast for the OCR peak from 4.0% to 4.25%.
“Current interest rates on carded mortgages, particularly for shorter maturities, should continue to rise,” Smith says.
“Furthermore, fixed-rate mortgages are rolling to much higher rates, pushing up average debt-service costs, albeit gradually. All in all, the average mortgage rate that borrowers face should rise slightly above 4.5% by the end of 2022 and approach 5.5% by early 2024.
“Even if OCR is cut in 2024, the average cost of credit is unlikely to decrease until 2025.”
Although ASB economists expect annual CPI inflation to have peaked (at 7.3% in June), they believe domestically generated inflation will only slowly decline from a record high of 6.3% .
“Assuming households maintain their current spending habits, more of the cost-of-living increases we expect will likely be domestically biased non-tradable goods/services or debt servicing,” says Smith.
He notes that these numbers are averages for the household sector.
“Households without large amounts of debt will have it better, while households with high levels of debt and those without a decent income cushion will have a much harder time.”
But he says while costs and prices have risen sharply, household incomes have also risen sharply.
“In fact, we were surprised at how quickly household income growth has responded. An exceptionally tight labor market has clearly contributed to companies having to pay more to attract and retain employees.” According to June 2022 household labor force survey income figures, average household incomes increased by almost 6% in June 2022. Wage earners did particularly well, seeing an 8.7% increase in gross weekly earnings. The strength of the latest numbers has been confirmed by a number of other polls. “
Smith says that after deducting income taxes and Kiwisaver contributions (which total just under 40% of the increase in household income), the figures suggest after-tax incomes increased by just over $100 per week per household in June 2022 , broadly in line with the rise in the cost of living.
“We expect household incomes to grow more significantly over the next few years, largely driven by sizeable wage increases and the expected recovery of other incomes. This should mean that households in general should have sufficient funds to pay the bills and potentially increase consumer spending. However, the impact will vary greatly depending on the individual circumstances of households.”
The economists calculated a household income gap, which is the difference between the weekly increases in after-tax income and the cost of living.
“The weekly increase in the cost of living in June 2022 was the highest in at least 20 years, but this was more than offset by a sizeable increase in after-tax income,” says Smith.
He says the ASB economists’ analysis suggests the outlook for fiscal spending “is not as bleak as it looked last year when we highlighted upside risks to the inflation outlook”.
“The economy could continue to surprise with its resilience and increase capacity pressures. The outlook for wage inflation is clearly stronger and in the absence of a labor productivity miracle, there is limited scope for sustained strong wage growth without blowing an inflationary seal. Risks of an extended period of high wages and core inflation remain.
“What is the impact on monetary policy settings? We expect another 125 basis points of OCR increases by early 2023 and a peak OCR of 4.25%.
“The higher the OCR goes, the greater the subsequent decline, and we believe the pressure on household budgets will be felt acutely by some households. Longer-term underperforming fiscal spending could lead to OCR cuts, but not until the RBNZ is confident it is on top of inflation, which seems a long way off given weak labor supply and potential output growth.
“Conversely, persistently high wage inflation rates, unbalanced by rising productivity and/or a more resilient outlook for the household sector, point to a longer period of tightening monetary policy and possibly a higher OCR peak than our (upwardly revised) forecasts suggest . “