Big rise in costs for home owners; Non-banks eating into big banks

An example was given of householders having to earn an extra $22,500 to keep the roof over their heads that they already have.

The numbers came from the independent economist Cameron Bagrie, speaking to  a webinar on economic trends which was put on by non-bank lender Bluestone.

He was speaking as the RBNZ prepares yet another big rise in the Official Cash Rate (OCR) later today, following earlier big increases and with more to come.

This trend is happening as the bank struggles to bring 7.3% inflation closer to its target range of 1% to 3%.

Bagrie told his audience the RBNZ had no alternative to fighting the “inflation thief”, but it would be costly to people whose fixed-rate mortgages are approaching their rollover date.

“If you have got a 2.5% mortgage, the odds are that in the next 12 months you are going to be facing a 5.5% mortgage.

“Say you borrowed $500,000, the effect of a 3% rise on $500,000 is $15,000. Now, $15,000, after tax, is equivalent to $22,500, pre tax.”

The inference from Bagrie's argument is that people would need either to get a payrise of $22,500, or to cut expenditure by $15,000, just to stay still.

The impact of these trends was really significant, and he said the dangers were aggravated by uncertainty in China, geopolitical tension and poor quality decisions by politicians across the globe.

However, there were some positive signs, such as an easing of rents and improved home availability in Auckland, and a levelling off and future small decline of inflation.

In another part of his talk, Bagrie said non-bank lenders were eating into the business of the mainstream banks.

Their share of housing lending had risen from about 2% to over 10%. And while it has slipped over the past few months, the percentage was forecast to rise again.

“Some this has been a consequence of the CCCFA, some has been because banks' risk appetite has tightened up an awful lot, some of it has been that banks just did not have the capacity,” Bagrie said.

But there was also a change in approach.

“Banks out there at the moment just want vanilla deals.”

Bagrie said banks had a nice square box and if borrowers had a square deal they would fit into that nice square box. But if they didn't they would tend to go elsewhere.