The average one-year mortgage rate is currently 7.23 per cent. Photo / Getty Images
Hi and welcome to Inside Economics. Every week, I answer reader questions about the economic forces shaping our world and take a deeper dive into some of the more left-field economic news you may have missed.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
Q: Hi Liam, in the US they have up to 30-year fixed mortgage rates. My understanding is that in some cases there are no break fees from the outset, should you choose to sell or refinance. Or there is a sliding scale of fees over a five-year basis then no fee. None of the fees which are charged are as prohibitively expensive as here. Why are such products not offered here? - Bruce
A: Where’s the fun in fixing for 30 years? What would Kiwis talk about at BBQs and worry about at night if we didn’t have a mortgage rate to refix? Our mental health? Relationships? Perhaps we’d pay more attention to investing and saving.
Seriously though, the New Zealand obsession with short-term fixed mortgage rates is something of a cultural quirk. I suspect we all quite enjoy it in a masochistic way.
One technical reason for the inability of local lenders to provide longer-term fixed mortgages is that we just don’t have the depth of market in this country to fund them.
In other words, there just aren’t enough large long-term investors seeking fixed investment returns across that timeframe. Banks have also made the point that there isn’t much demand here for longer terms - although that seems a bit self-fulfilling. We’re very much conditioned to go for six-month, 12-month or two-year rates because that’s where the banks seem most competitive and it’s usually where the best bargains are.
Some people may recall that local banks did offer seven-year fixed rate terms a few years ago - but they weren’t popular. Clearly, we just aren’t keen to be locked in for the long haul despite the financial security that would provide.
We don’t seem to be quite as bold as the Aussies though, either.
In Australia, the bulk of mortgage holders stay on floating rates. They prefer to take their chances on the ups and downs of the market in that optimistic Aussie way.
Of course, floating rates, relative to fixed, are cheaper there than here. For example, Westpac Australia is currently offering a basic variable rate of 6.44 per cent while the one-year fixed rate is 6.59 per cent.
Again with the self-fulfilling prophecy... it’s the nature of markets that the best bargains land where the bulk of the competition is focused.
Another benefit for the Australian economy is that the interest rate moves of the Reserve Bank of Australia have a much faster impact.
We Kiwis are hooked on short- and mid-term fixed rates and are kind of stuck with them. But some more choices would be nice. A market opportunity for a new player perhaps? Don’t hold your breath!
Q: We have recently moved from buying the odd book from Amazon to purchasing everything from clothes to travel accessories to electric toothbrush heads from large, reputable offshore online retailers. The price disparities are huge ($21.50 for 16 replacement toothbrush heads versus $9.99 for two heads in New Zealand), the quality is identical to NZ-purchased, and the returns policy is excellent.
Is the effect of offshore online retail being captured in official statistics such as CPI and the private consumption component of GDP? And more broadly, is its effect on the retail sector being quantified? - Peter
A: I suspect you are part of a rapidly growing number of Kiwis shopping on the likes of Amazon and Chinese retail site Temu.
Analysts at Stats NZ confirm that it does not currently measure prices of goods bought online from overseas sites in the Consumer Price Index (CPI).
There are several challenges collecting that sort of online overseas data, including consistent data supply and managing product churn, said analysts with Stats NZ’s Consumer Price Delivery and National Accounts Quarterlies.
“We would need to work through these issues before we could consider incorporating them into the CPI. And for that matter, offshore retailing is not captured within the retail trade data as that only captures domestic retail activity.”
However, offshore online retail of goods would be fairly well captured by the low-value imports series in the GDP, they note.
“This would be included in the estimates of household consumption, although there is a little more uncertainty in this than some of the other household consumption components.”
Vinyl word...
The basket of goods for the CPI is regularly updated to reflect modern trends. In 2020, for example, vapes were added and compact discs were removed. But music lovers (and fans of old-school technology) can take heart.
Britain’s Office for National Statistics has just added vinyl records back into its inflation basket, The Economist reports. Records were taken out of the basket in 1992, but never went away and have gone from strength to strength. As a long-time vinyl record collector, it is great to see. Other additions to the basket in the UK include air fryers and edible sunflower seeds. Hand sanitisers and hot rotisserie-cooked chicken were removed.
Last week I took a look at the hidden inflation that occurs when companies shrink product size (shrinkflation) or quality (skimpflation) without reducing the price.
The New York Times reported that the former but not the latter was captured by the statistics department there. Stats NZ senior manager for prices at Economic and Environmental Insights, Nicola Growden, confirms we’re much the same.
“A short answer to the shrinkflation and skimpflation question is yes, this is also the case for Aotearoa New Zealand’s CPI,” Growden said.
“In the case of shrinkflation, if the consumer is getting less product for their money or paying more to get the same amount as before, this is classed as a price increase and would be captured.”
In the case of skimpflation, if the quality of the product has changed - for example, the paper towels are made of poorer material or have been switched from three-ply to two-ply - but the price has stayed the same, then the CPI wouldn’t show that because the consumer is getting a worse-quality item, so it’s not a like-for-like comparison.
This can be quite tricky to measure in practice as some price changes could be due to quality and some could be pure price change, so they have to decide how much of a change to show in the CPI and how much to cancel out as a quality change, Growden said.
“We often have to make a call on how much we do show as a price change and it isn’t always easy in practice to split these things out.”
The issue of what causes New Zealand’s relatively high costs for building and building products prompted some great reader responses. Many people feel the pendulum has swung too far towards over-regulation. Perhaps we have. The combination of the leaky building debacle and the Christchurch Earthquakes prompted new regulations around building codes and products.
I’m all for taking a look at the risk versus reward equation around regulation. But it is worth remembering that the leaky homes era of cheap shoddy wallboards is estimated to have cost the country $12 billion (according to a PWC report from 2009) and the Christchurch earthquake cost 185 lives!
Perhaps we should just look to what is done internationally in quake-prone regions.
“California has the strictest building code in the Western world as well as broadly similar geotechnical issues like earthquakes and so forth,” writes reader Marcus A.
“I can think of no reason whatsoever why building materials permitted under the California code could not simply be allowed as compliant here in New Zealand and imported as required by whoever wants to import the materials.”
Reader Mark Y doesn’t muck around with where he sees the real problem:
“It’s hard to find another example that has done more harm to the cost of building in New Zealand over the last few decades than the Fletchers/Carters duopoly.” He says the practice of giving builders a ‘rebate’ on the purchase price of goods through the merchant chains at the end of the year should probably banned too.
It effectively locks them into a merchant (selling products from only one manufacturer) with inflated purchase prices that pass through to the client, and then they get the ‘rebate’ at the end of the year. It all seems widely accepted here, he says.
It’s no secret that New Zealand’s sovereign debt position blew out through the Covid years - net debt of $73b, net core Crown debt of $138b... there are a lot of different ways to present it. But it’s all fairly ugly. It is important to keep it all in context of course. International rating agencies tend to be a bit more relaxed about it all. This week’s chart offers one clue as to why. Globally the total sovereign debt for rich (OECD) nations has blown out to record levels. The Financial Times reports that debt issuance is estimated to hit US$15.8 trillion late this year!
Who do the governments of the world owe all that money to? Investors, of course, all those pension schemes and managed funds that include Government bonds in the mix. That should serve as a reminder of why some countries can get away with much higher debt-to-GDP ratios than we can in New Zealand. It’s all about savings... and Kiwis just don’t save enough.
Last year was the fifth-worst for world trade since 1950, this stark new graphic from global consultancy Capital Economics shows.
There are a lot of reasons why New Zealand’s economy is in the doldrums right now, but given how reliant the country is on trade, this has to be a contributing factor.
Porkie pressure
In most countries, there’s a food group that provokes a powerful public response when prices rise and fall. In New Zealand, it is the 1kg block of cheese that grabs headlines - mostly when the price goes up.
In China, it’s pork.
The Financial Times reports that Beijing has unveiled regulations that aim to more tightly control the world’s largest pig population after a recent growth in herd numbers weighed heavily on pork prices.
The price of pork, a staple good in China and the most important component of its closely-watched consumer price index, has fallen drastically as a result, adding to a wider climate of deflation that has pressured Beijing for the past six months, the FT reports.
China’s pig herds, which make up about half of the global total, were devastated by an outbreak of African swine fever from 2018 to 2021, leading to widespread culling, higher prices and a push for more production that in subsequent years resulted in volumes recovering to the point of overcapacity.
China’s pig population was 434 million in 2023, up significantly from a low of 310 million in 2019.
This would go some way to explaining the pressure that Kiwi exporters are feeling in the Chinese export market right now...
Export price pressure
Deflation in China means lower prices and that is ominous for New Zealand exporters. With plenty of cheap pork on offer, New Zealand’s lamb and beef sales are coming under pressure. As the Business Herald’s Jamie Gray reports in a comprehensive review here, all the major commodity groups are coming under pressure, but the meat sector is really in the gun. The main issue is China, with exports down 21 per cent year-on-year to $263 million.
Spending tanks
More signs that the economy is struggling, as we await GDP data to tell us whether it’s officially a recession (next Wednesday at 10.45am): retail spending by Kiwis dropped 1.8 per cent, or $120m, in February compared with January, new figures from Stats NZ showed.
Total February card spending “tanked despite climbing prices and strongly growing population,” said ASB senior economist Mark Smith.
“The figures reveal that the underlying retail position is extremely weak, with per household retail volumes contracting as living cost headwinds and the cooling labour market backdrop dampen household spending patterns and appetites.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
Westpac announced changes to its six-month and one-year rates today.