New Zealand’s private debt levels remain high compared to the rest of the world and some borrowers will have to “cut their cloth” with rising interest rates, Deputy Prime Minister Grant Robertson says.
“I’m confident most people will [cope with it] but unfortunately with the very large amount of money people have borrowed there will be one or two who might struggle.”
Robertson was questioned about both public and private sector debt levels at a conference held by the Financial Services Council today and whether there was cause for concern about rising interest rates impacting on people’s discretionary spending and the flow-on effect to the economy.
“I think the New Zealand economy is more than resilient enough to deal with that – whenever you are talking about macro things it is always good to bear in mind the micro and that will be for some people they are going to have some shifts in their lifestyles where their discretionary spending won’t be as much as it might have been.”
Robertson said interest rates were close to 7 per cent when he bought his first house.
“Some of us have … seen good times but that is the reality of life that interest rates do move around and people will have to cut their cloth to fit with that.
“But at a macro level I am confident we are a broad-based economy with lots of prospects for sustainable growth so I don’t think it will be a major drag on the overall economy.”
Reserve Bank figures show 67 per cent of fixed mortgages or around $193 billion worth of loans are due to come off their fixed-term over the next year.
Mortgage rates have already risen at their fastest rate in 15 years and the official cash rate is expected to increase from 0.75 per cent to 2.6 per cent by 2023.
Robertson said it was a lot of money. “But I think we are in a position where we are coming from an incredibly low base and moving up.”
“For those individuals they are going to be looking at that and going yip okay I’ve got a bit less discretionary income than I did have but overall the fundamentals of the economy remain strong.”
Of top of rising interest rates the Government has just introduced legislation to tighten lending controls through the Credit Contracts and Consumer Finance Act on December 1 to ensure lenders can prove they are undertaking responsible lending and not giving loans who can’t afford it.
Robertson said the Government had slowed down the introduction of the law to enable banks and their customers to be able to adjust through the Covid times.
“Banks have been pretty careful with their lending through the Covid period but we still need to make sure our rules are fit for purpose and up to date. We have had the IMF and others come through over the last few years and make pretty serious recommendations to us about how we do need to improve the settings so we did our best to mitigate the damage that might be caused as a result of this but I think overall it is going to be good for the financial sector.”
Brokers have warned it will make it harder for first home buyers, the self-employed and retirees to borrow money as they have all their regular expenses examined.
But Robertson said it was arguable about whether the change would make any difference to credit availability and said there had been no shortage of money flowing around the economy in the last 20 months.
“While there might be some retreat back from that, both from ourselves and also from the way banks are working, particularly as they are looking towards changes in the housing market and the LVRs and where the Reserve Bank is looking at.
“I think there is plenty of money flowing around the New Zealand economy I just think there has been a period of caution as a result of the restrictions and that’s fully understandable.”
Inflation a concern
New Zealand’s inflation is being forecast to rise from 4.9 per cent to upwards of 6 per cent.
Robertson said inflation was high and was also coming off a long period of low inflation.
“The good news is when you project it from there the Reserve Bank projections have it coming back down again and obviously one of their jobs is to make sure we have price stability in the medium term and most commentators are broadly agreeing with that.
“So we have got this period of heightened inflation and everybody needs to take that into account. As a Government we will be doing that we will still be investing carefully and responsibly to keep the economy moving forward.”
He said a lot of it was way beyond the control of New Zealand. Germany and the United States both had inflation of 6 per cent while the average for the OECD was 4.5 per cent.
“This is a global phenomenon there are supply chain constraints, higher oil prices, some will dissipate out over the course of the year but effects will be felt so we need to manage our way through it. Persistent without being permanent is how I would describe it.
“It is not going to disappear tomorrow or next month or even through the course of next year but I do think when you look at what the Reserve Bank is forecasting if you look at the medium period into 2023 it starts to come back down again.”
Robertson said inflation was a concern and that was why the Government was taking action to address the issues that sat behind the supply constraints.
“One of those is labour constraints and obviously as we move into 2022 we are in a strongish position to be able to see more people come in, help ease some of those labour shortages.
“Supply constraints I do think will ease through 2022, we are already starting to see the price of containers come down a little bit. We have really got to look at what are the drivers of it and focus on how we can mitigate those and support that kind of sustainable productive growth.”
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