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The New Zealand Government’s response to COVID kept New Zealanders in work and may have avoided a deeper recession. With the benefit of hindsight, these measures were left in place too long and have recently combined with global forces to push New Zealand inflation to its highest level in more than 30 years. Central banks are now rapidly withdrawing stimulus and New Zealand monetary policy settings are restrictive. Households are feeling this most acutely as inflation is eroding purchasing power, the cost of borrowing is increasing, and asset prices have recently fallen.
This note seeks to “look under the hood” of these dynamics. It describes what an “average” New Zealand household may be currently experiencing and whether there is any relief in sight. The long story short is that hurting the consumer is a key channel through which the Reserve Bank of New Zealand (RBNZ) will take heat out of the economy and lower inflation. Things may get worse before they get better.
Household balance sheets are in good shape…
Disposable (after-tax) income for the median New Zealand household was about $71,500 and $75,000 in 2020 and 2021, respectively. With the help of the Government’s wage subsidy scheme, closed borders and COVID lockdowns, an average of 7.5% and 4% of this was saved in each respective year, totalling $22.5bn or $12,000 per household.
Rising asset prices also played a key role in boosting household wealth during this time. Average household wealth increased $275,000 over 2020 and 2021 thanks to rising house and equity prices. This likely provides some buffer to households to weather the growing challenges.
… but cash flow is being severely challenged…
Household cash flow challenges are immense. Consumer prices, as measured by Statistics NZ, have increased almost 10% since the end of 2020 and the RBNZ expects them to increase another 4-5% over the next year. Price increases have been largest among transport, food and housing that together make up almost 60% of the Consumer Price Index.
Statistics NZ’s household Living Cost Index (LCI) allow us to examine how inflation may be impacting different groups. Those on lower incomes are likely to have felt the increase in housing (measured as rent in the LCI) and food costs most acutely as these make up a larger share of expenditure. The higher housing costs have also hurt beneficiaries much more than others with 43% of their expenditure going to housing, versus 26% for all households.
Higher mortgage rates are having a large impact on borrowers. The LCI estimates that interest payments have increased by 34% since the end of 2020. About 40% of households have a mortgage and we estimate the average mortgage is about $430,000. The lowest mortgage rate is currently about 5%, more than double the low seen in the middle of last year and 1.50% above the current average outstanding mortgage rate. Almost 50% of outstanding mortgages are due to re-fix over the next year and a movement from 3% to 6% for a 25-year mortgage represents a 36% increase in the mortgage payment.
Higher mortgage rates are also impinging the ability for new house buyers to enter the market. 60% of household income is now needed to service a mortgage on a median-priced house with a deposit of 20% at the average standard two-year mortgage rate. This was less than 40% of household income in June 2020.
Job security is high with the unemployment rate historically low and large numbers of job vacancies, but household income has not been able to keep up with inflation. Wage growth and income from bank deposits have been negative in real terms. Our analysis suggests that the average household is no longer able to save without reducing consumption.
… and balance sheets are now taking a hit from lower asset prices
Wealth increases made since 2019 continue to echo in consumers’ current ability and willingness to spend, however, it is the falls since the peak that are freshest in memory and bear the largest influence on consumers’ wallets. In the first half of this year the median New Zealand house price fell 3%. Adjusting for the composition of sales, house prices fell almost 6%. This compares to a 17% and 6% fall in New Zealand equities and bonds, respectively, from their highs. Allowing for leverage, we estimate net household wealth dropped more than 10% in the first half of this year.
Using data from Q2 1982 to Q2 2016, the RBNZ estimates for every 1% change in net financial or real housing wealth, consumption changes 0.22%. More recent RBNZ work suggests an asymmetric response, with a greater consumption response (0.23%) to negative housing wealth shocks than positive ones (0.13%)
The household hurt is far from over
Household incomes may remain under pressure over the next year as inflation remains high and mortgages re-fix on much higher rates. From a balance sheet point of view, while equity and bonds are offering better value at these levels, most expect house prices to decline another 5-10%. As the economy slows, the risk of job losses is likely to add to consumer caution.
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