The core reason behind inflation, and consequently, higher interest rates, is arguably due to the prolongation of exceedingly low rates in the past. This approach was the consensus of central banks post-2008 and more recently in March 2020. While this strategy was widely endorsed, I held reservations. Over time, my perspective has shifted towards the belief that these conditions have been harnessed as a means to counteract potential disruptions to the financial system from technology-induced deflationary forces. Given the advancements in artificial intelligence (AI), the advent of Decentralised Finance (DeFi), changing dynamics of global power, bank failures, and the potential depreciation of the US dollar as the world’s reserve currency, it’s not difficult to comprehend that the rate of change is accelerating.
Inflation typically arises when the money supply surpasses the availability of goods and services or when these resources decrease in supply. Global central banks have been mitigating technology-induced deflation for some time now. With the assistance of supply chain disruptions due to pandemic, conflict, and emerging labour shortages due to demographic changes, they have reinforcement in this effort.
I’d like to point out that my base scenario anticipates interest rates to decrease in the near to medium term. However, alternative viewpoints, like those presented in my interview with Michael Every from Rabobank, provide compelling theories for prolonged higher interest rates. I encourage you to watch our discussion on this subject: https://youtu.be/RzBhDEXrTig.
It’s important to remember that inflation is a complex phenomenon. Relying entirely on predictive models and policy interventions to control it could be risky though in the type of world we’re now living in.
In 2021, New Zealand property saw the introduction of new taxes, adjustments to LVR restrictions, and, most crucially, modifications to the CCCFA, predominantly under political influence. (Please view this informative video on this topic: https://youtu.be/AHzA-z8G4XA). Property continues to be a popular asset for long-term wealth building for many investors, and it plays a pivotal role in credit creation in NZ, so unless there’s a better solution that actually works (ie, not socialism), expect this trend to continue.
The increase in interest rates is a vital factor for borrowers, along with the decreasing availability of mortgage finance. The cost and accessibility of lending influence housing prices more profoundly than generally acknowledged, which, in turn, have broader economic impacts.
Here’s an interesting observation: around 70-80% of all lending I facilitated over the last two years would not meet the current criteria and interest rates.
But what about some more silver lining right?! Political ideologies will ultimately reconcile with economic realities. It’s crucial to maintain a flexible outlook regarding the future. If you lock in your mortgage rate for a shorter period, you risk facing higher rates later. Conversely, fixing for the long-term might trap you in potentially higher rates while everyone’s enjoying the ride down (assuming that’s what actually happens).
The question of governmental spending needs unbiased analysis, as it’s often inflationary, especially when it doesn’t enhance productivity.
We might do well actually, to question why governments aren’t adopting fiscal prudence like many households are right now.
One might infer that the Reserve Bank is facilitating the government’s wealth redistribution efforts (with inflation acting as a sort of tax levied by the monetary authority, the Reserve Bank of New Zealand). While it might be tempting to think a change of government could rectify this, it’s plausible that all politicians would sustain this mutually beneficial alliance between banking and politics. Yet, I trust that New Zealanders will keep this in perspective as they head to the polls this year.
So all this to say: The lure of obtaining the lowest possible rate on your mortgage is understandable. While it’s rewarding to time your mortgage fixed rate term just right, I’d like to remind you this is about risk management, not speculation. Rates could come down in the near future yes, but don’t discount the possibility we’re simply sitting in the eye of a storm.
*Of course, this can be considered financial advice (because I don’t know anything about you!). If you would like some advice specific to your situation, get in touch with me here.