Major market moves! A wave of interest rate rises sweeps the world! How far away is a rise in New Zealand? Could interest rates be the final straw for the housing market?

With this global wave of interest rate rises, will New Zealand raise rates earlier? Whether and when rates will rise have become questions of nationwide interest.

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Economists: Higher mortgage rates

would have a devastating impact on the housing market

Yesterday, ANZ economists said raising interest rates now would prompt investors to sell large numbers of homes, effectively slamming the brakes on the property market. They said the government was very unlikely to do this.
 
“New Zealand's current low interest rates will continue for some time. The Reserve Bank will wait a while before beginning to raise rates,” the economists said.
 
Commenting on the impact of the New Zealand government's newly announced housing policies, ANZ chief economist Sharon Zollner, senior economist Miles Workman and senior strategist David Croy said: “Higher interest rates would leave many heavily indebted households very vulnerable, with their incomes falling noticeably.”
 
“For investors, higher interest rates will no longer bring larger tax deductions, following the removal of interest deductibility. Any rise in mortgage rates would have a devastating impact on the current property market.”
 

Economists: Waiting too long to tighten policy could make the situation difficult to control

Economists said the “increased risks now facing the wider economy” should not be underestimated.
 
“We are not forecasting a fall in house prices, but given their current elevated level, we certainly cannot rule it out.

Policymakers are trying to engineer a ‘soft landing’ for the property market, which is very important for both housing and the national economy as a whole.”
 
Falling house prices would very likely affect market confidence, potentially triggering negative effects and weakening economic activity. But policymakers cannot escape the links between housing and the wider economy, and moving from a vertical take-off to a soft landing may be difficult.
 
The economists said a slowing property market should not be too concerning for the wider economic outlook. With the opening of the trans-Tasman travel bubble and the gradual reopening of borders ahead, people could shift their spending from housing to other areas, such as international travel and services.
 
“But the economy remains quite fragile this year, which will make the Reserve Bank of New Zealand very cautious about deciding to raise rates. We expect low interest rates to continue for some time.”
 
“The lesson from the 90s of the last century is that, when inflationary pressures are rising, tightening policy too late means interest rates and the exchange rate must remain higher for longer. By then, policy will struggle to bring the situation under control.”
 
“This could happen again, but we note that, given the tax changes and household debt levels, any rise in interest rates could affect the situation very quickly.”
 

Monetary policy settings and insufficient housing supply

are the main culprits behind New Zealand's rising house prices

The economists discussed and distinguished New Zealand's “cyclical housing problems” from its “structural problems”—in other words, the cycle and the trend.
 
“Monetary policy settings are widely blamed for house prices spiralling out of control,” the economists said. “But monetary policy is only one factor driving prices higher. If we had enough homes, prices would be lower.”
 
If the decades-long housing shortage could be addressed promptly, lower interest rates would have less of an effect on house prices. Simply put, if we had enough homes to meet people's housing needs, prices would be lower.
 
“To achieve this, the government needs to keep actively pursuing land supply policies, such as freeing up land and addressing housing shortages. But politically, this is difficult when so many voters have staked their retirement on housing.”

Conclusion:

Overall, the government's new measures are likely to succeed in cooling the property market. But tilting the playing field away from investors towards first-home buyers will never be enough to address the high cost of living faced by New Zealanders on low incomes.