Dancing to the music of low interest rates. Photo / Mark Mitchell
Dancing to the music of low interest rates. Photo / Mark Mitchell
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
THREE FACTS:
In 2014, New Zealand was dubbed a “rock star economy” by HSBC economist Paul Bloxham.
The Reserve Bank cut the official cash rate this week and signalled further cuts to come, meaning lower borrowing rates for households with mortgages.
The cut came nearly a fortnight after the Government’s tax policy took effect.
OPINION
Imagine a New Zealand where the economy is growing at 3.2% a year, where inflation is as low as1.5%, and where the official cash rate is just 3.25.
This version is New Zealand as it existed in the June quarter of 2014, a year that began with HSBC economist Paul Bloxham dubbing New Zealand the “rock star economy” and ended with National under John Key settling into a comfortable third term having won in September the closest thing MMP politics has to a landslide.
When the party’s current leader, Christopher Luxon, promises to get New Zealand “back on track”; the economy in 2014 is probably the “track” he is trying to get back on.
We got a glimpse of that country this week – complete with the return of a certain German tycoon to public life. On Wednesday, the Reserve Bank (RBNZ) cut interest rates, kicking off what it forecasts to be a cycle of monetary loosening which (if you believe those forecasts, and you have plenty of reason not to) means election year 2026 will look an awful lot like 2014.
The Bank forecast annual GDP growth at 3.3%, CPI at 2% and the OCR at 3.4 – more or less exactly where they were going into the 2014 election.
If that is the case, then this August might be the most pivotal month in our politics since August 2021, when within a couple of days, the Government plunged the country into one last, long lockdown, and the Reserve Bank said the era of easy money was over by signalling the start of the tightening cycle that’s only ending now. That August ultimately ended Labour. This August might make the coalition.
The significance of this is yet to be adequately priced in by political observers.
Home-ownership is on the decline in New Zealand, but this country is still a majority property-owning democracy. Two-thirds of households own their houses. This matters in electoral terms because those households are going to start to see their financial positions improve through a couple of years of house price growth beginning next year, according to the bank’s forecasts.
One-third (32%) of households have a mortgage on their primary residence (their main home – in plain English). The last data we have for the average size of that mortgage is fairly old, dating back to 2021. It puts the average size of an outstanding mortgage at $260,000 (a figure that is probably closer to $300,000 now given the amount people borrow for houses has increased).
Last year, as retail mortgage rates peaked, households on an average two-year mortgage rate of 7.6% would have faced interest costs of $380 a week to service the interest on that mortgage (to say nothing of paying down the principal). If 200 basis points in forecast OCR cuts between now and the election are passed on to those borrowers, that drops to $280 – a saving of $100 more a week.
Add to that the $20 a week someone earning $80,000 would get from the Government’s tax plan (mortgage borrowers tend to be higher-earning) and an average, mortgaged household of two incomes could find themselves $140 a week better off by the election, or $560 a month.
Since January 2020, 850,000 mortgages have been issued to owner-occupiers (some of these will be double-ups – households that have bought and sold multiple times in the past four years). The average value of those mortgages at the time they were written was $320,000.
Reserve Bank governor Adrian Orr with this week's Monetary Policy Statement. Photo / Mark Mitchell
Of those, 67,000 mortgages were written to first-home buyers. The average amount of these when written was a staggering $525,860.
At the peak of the inflation crises, these households might have been paying $783 a week just to service the interest on their mortgage. If 200 basis points in cuts is passed on in retail rates, they will be $200 better off a week in interest costs plus $40 a week better off thanks to the tax package, a “better off” change of nearly $1000 a month (about $1100 if they have children in early-childhood education) – a sum of money so vast it defies comprehension.
The KiwiBuild generation, which propelled Labour to office on the back of the Key-English housing crisis, will split – those “left out” will probably stay red-green, those who “got in” are likely to go deep blue or yellow. This isn’t the Government’s victory to claim (they’ll claim it anyway), but more an indication of just how much pain the economy has been in these past two years – and what it will mean to have that pain unwound.
The change in interest rates creates a powerful coalition of voters who are more likely than not to re-elect the incumbent Government. Two-thirds of households will benefit from rising asset values and of those, half will enjoy higher disposable incomes thanks to lower mortgage payments – some significantly. Given homeowners tend to be more likely to vote than not, this bloc is more likely to make itself heard at the ballot box.
There’s an argument to be made to the contrary, however. There may just be a narrow bloc of voters the opposition could stitch together to win in 2026.
A rock star in his own right or a tribute act? Christopher Luxon and John Key. Photo / Dean Purcell
The first task will be running on a credible tax plan and fiscal responsibility. If voters bank 2026′s low inflation and interest rates and don’t associate it with the incumbent, they’re more likely to flirt with an alternative, provided that alternative promises not to drag them back to the economy of 2023.
To do this, Labour has to tie itself to the current economic track and ensure nothing it promises risks upsetting it.
The second task will be to do with the one part of the economy likely to perform poorly in the next two years: employment. The unemployment rate is set to rise to 5.4% and stay relatively high throughout the forecast period (this is high – but lower than it was during the “rock star economy” year). Youth unemployment is currently double that. There simply aren’t enough votes among the unemployed to propel a party to victory, but if one in 10 young people looking for a job can’t find one, then Labour might be able to win over a good number of those people and, more importantly, their parents. The challenge is promising to lift employment without excessively stimulating the economy and reviving inflation. Labour needs to find a way to avoid driving a wedge between voters without jobs and voters with mortgages, whose interests are currently at odds.
Neither side of the aisle should forget there is a majority of non-mortgaged households. Labour’s finance spokeswoman, Barbara Edmonds, tried this week to link the interest rate cuts to public service cuts and rising joblessness, saying “a tiny celebration” was simply “not worth the thousands of jobs lost, and the recession forecast to come”.
There’s a strong argument there. It’s not quite “is it worth it?” (it is worth it – unchecked inflation would destroy the economy); “has the Government got the mix right?” is probably nearer the mark.
If the Government does too good a job at crediting its public spending restraint with bringing interest rates down then voters might actually believe them. Can Labour convince a coalition of the jobless, renters, and superannuitants that the Government has pillaged public services to offer mortgage relief to asset owners?
A superannuitant waiting in a crowded hospital may decide the mortgage relief for their children and grandchildren comes at too great a cost to themselves – and make no mistake, it’s health, buckling under the weight of intense demographic pressure, where the pain will be felt most acutely, and by a broad cross-section of voters.
That said, Labour cobbling together this unlikely and in most other respects incoherent coalition of unmortgaged voters would have to be an outlier scenario. In most cases, good growth, low inflation, and affordable borrowing almost always benefit the incumbent.
Put on your dancing shoes, Mr Luxon, and cock an ear to the wind. The rock star economy is ready for an encore.
