Eye2theLongRun

ASB expects: We expect the OCR to move up soon. Our forecasts have 50bps of OCR hikes by the end of the year and assume a historically low OCR endpoint of 1.50% by late 2022. Mortgage interest rates have already been on the move and look set to continue to climb. We envisage a historically low peak in average mortgage interest rates this cycle. How will moderately higher interest rates impact the household sector? There are 3 channels:

1) House prices – higher mortgage interest rates should sharply slow housing market momentum, with prices largely expected to flatline over 2022.

2) Economic activity – the gradual pace of OCR hikes that we envisage is unlikely to derail the economic expansion and so shouldn’t significantly weigh on household incomes and employment.

3) Cashflow – The average mortgage rate for housing lending of just under 3%, a record low, which has bolstered household debt servicing. NZ households are net borrowers from financial institutions, so an increase in customer interest rates will reduce household cashflows. Our estimates suggest a 100bp increase in customer interest rates will reduce household cashflows by roughly $2.6bn per annum, approximately 1% of household disposable incomes. It’s not immaterial, but our assessment is that the increase in debt servicing costs should be manageable for most households. Borrowers with large debt exposures will clearly fell the cashflow hit. Some will struggle.