SBA economists estimate households will still face average mortgage costs of 5.5% by 2024

Average mortgage costs for Kiwis are expected to continue to rise and approach 5.5% by the start of 2024, according to SBA economists.

And they say that even if the Reserve Bank (RBNZ) lowers the official exchange rate in 2024, average borrowing costs are unlikely to fall until 2025.

SBA Chief Economist Mark Smith made a detailed household cost of living analysiswhich follows the one he made earlier in the year.

In the latest update, Smith estimates that households could face a weekly increase in the cost of living of around $110 for the year to June 2023. However, he notes that household incomes are also rising strongly.

In terms of mortgages and debt service, Smith says those costs “still have to run.”

The OCR is currently at 3.0%. The SBA recently raised its forecast for the peak OCR from 4.0% to 4.25%.

“Current mortgage interest rates, especially for shorter terms, are expected to rise further,” Smith said.

“Furthermore, fixed rate mortgages continue to fetch much higher rates, driving up average debt service costs, albeit gradually. In total, the average mortgage interest rate faced by borrowers is expected to climb slightly above 4.5% by the end of 2022, and approach 5.5%. % by early 2024.

“Even if the OCR is reduced in 2024, average borrowing costs are unlikely to fall before 2025.”

Although SBA economists expect annual CPI inflation to have peaked (at 7.3% in June), they believe that domestically generated inflation will be slow to decline by its record level of 6.3%.

“Assuming households maintain their current spending patterns, more of the cost-of-living increases we project will likely be domestically driven. On the approximately $110 weekly cost-of-living increase of households in June 2023, about two-thirds of them would either be non-tradable goods/services or debt service,” Smith says.

He notes that these figures are averages for the household sector.

“Households with little debt will fare better, while households with high debt and those without a decent income will find the situation much more difficult.”

But he says that while costs and prices have risen sharply, household incomes have also risen.

“In fact, we were surprised at how quickly household income growth responded. Having an exceptionally tight labor market has clearly helped businesses pay more to attract and retain staff. June 2022 income figures from the Labor Force Household Survey, average household income increased by almost 6% over the year to June 2022. Employees performed particularly well, registering an 8.7% increase in their weekly gross income. The strength of the recent figures has been corroborated by a number of other surveys.”

Smith says that after deducting income taxes and Kiwisaver dues (in total assumed to be slightly less than 40% of the increase in household incomes), the figures suggest that after-tax incomes have increased by a little more of $100 per week per household in June 2022. year, broadly on par with the rising cost of living.

“We expect household incomes to register larger increases over the next two years, largely reflecting significant increases in wages and salaries and the expected rebound in other incomes. This should mean that households in general should have sufficient funds to pay bills and potentially increase consumer spending. However, the impacts will vary greatly depending on individual household circumstances.”

Economists have calculated a household income gap that is the difference between weekly increases in after-tax income and the cost of living.

“Weekly increases in the cost of living in the year to June 2022 were the highest in at least 20 years, but this was more than offset by a significant increase in after-tax incomes,” Smith said.

He says analysis from SBA economists suggests the outlook for household spending “is not as dire as it looked last year when we flagged upside risks to the inflation outlook. “.

“The economy could continue to surprise with its resilience, adding to capacity pressures. The outlook for wage inflation is clearly stronger and absent a labor productivity miracle, there is little opportunities to maintain strong wage growth without blowing an inflationary seal Risks of a prolonged period of high wages and underlying inflation remain.

“What are the implications for monetary policy settings? We forecast a further 125 basis point increase in OCR by early 2023 and a peak in OCR of 4.25%.

“The higher the OCR, the greater the subsequent fall, and we believe the pressures on household budgets will be felt acutely by some households. Prolonged below-average household spending rates could trigger cuts from the OCR, but not until the RBNZ is convinced that it is on top of inflation, which still seems a long way off against the backdrop of anemic labor supply and growth production potential.

“Conversely, persistently high wage inflation rates that are not matched by rising productivity and/or a more resilient outlook for the household sector point to a longer period of tight monetary settings and potentially a peak higher OCR than our (upgraded) forecasts suggest.”

Comments are closed.