Reserve Bank Governor Adrian Orr explained what the decision to cut the OCR by 50 base points means for New Zealanders. Video / RBNZ
Opinion by Thomas Coughlan
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
Labour’s optimism is hardly surprising – most of the indicators in recent polls havebeen good for the Opposition. Not only does every recent poll show them winning back power, but the leading indicators, most importantly, how people feel about the country, suggest the Government’s party vote polling will continue to slide. This does not look like a flash in the pan (of course, polls being polls, it very well may be).
The economic forecasts for next year are propitious for an incumbent Government facing reelection. The Official Cash Rate (OCR) is forecast to fall lower and stay low, perhaps as low as 3%, inflation will be at 2.2% and the economy will be growing at about 2.4%. Even the unemployment rate, which earlier forecasts had suggested would spike high and stay high, is playing ball, hovering in the mid-4% range in 2026.
For a party that campaigned on getting New Zealand “back on track” those forecasts look like a measure of success – and a fairly firm ground on which to fight a battle for reelection. After half a decade of economic unrest beginning with Covid, a fairly solid economy of rising house prices, average (in every sense) economic growth, and relatively affordable mortgages would set the scene for a decent “why risk it” election campaign from the incumbent.
Many commentators have argued persuasively that the current coalition is the most right-wing in MMP history – but a Labour-Green-Te Pāti Māori combination would, by the same logic, be the most left-wing governing formulation. When National, Act and NZ First point at these relatively (emphasis on relatively) stable economic conditions and ask the two-thirds of home-owning households “why risk it?”, Labour needs to have a response. It’s not coincidence that the word “Marxist” bubbled to the surface this week.
This release of the Public Service Commission’s Manurewa Marae report and the shadow it cast upon Te Pāti Māori showed the right doesn’t have a monopoly on coalition chaos – it’s very possible that probes by the Police and the Privacy Commission begin to make a Government including Te Pāti Māori look challenging. That augurs well for a compare-and-contrast campaign from the right.
But if Labour’s celebration on last fortnight’s polls were premature – National’s gloating about the MPS (which included a patsy question asked in the House seconds after the document was released, and a rare Prime Minister and Finance Minister stand-up on the black-and-white tiles soon after) is too.
A National ad that overstates the impact interest rate cuts have on households. Photo / Instagram
For starters, National is vastly overestimating the impact on households. The party’s ads, released this week, claimed “a person paid on average” $3678 in mortgage payments a month in November 2023, when they took office – a figure that is over $600 a month lower now.
The ad is powerful, because it shows just how important monetary policy is to a Government’s fortunes (which is, of course, why we don’t let politicians near the OCR). Tax cuts are one thing, but ultimately, the very best a Government can offer most people in tax cuts is low double digits a week. Settling mortgage rates, by contrast, can improve most households’ fortunes by hundreds of dollars a week.
The problem with National’s ad is that it vastly overstates the indebtedness of a New Zealand household. This “average” mortgage is $550,000 – which you might think is an average mortgage in New Zealand given our overvalued property market.
But you (and the National Party) would be wrong.
The property market might, uncharitably, be described as a Ponzi scheme. Yes, prices are ridiculous, and yes, if you were a buyer entering the market today you may very well be looking at a mortgage of $550,000
Most buyers, however, are not buying their first home. The vast bulk of owner-occupier homeowners are on their second, third, or fourth home, each time using the money earned selling their prior home to buy a new one. This is one of the reasons governments of all colours talk out both sides of their mouth on house prices – for the two-thirds of households that own their own home, the boom times have delivered increased wealth that no amount of ordinary economic growth or public service delivery could provide, for the other third, rising house prices have destroyed the egalitarian promise of this country.
That means that despite the average house price in New Zealand being over $900,000 according to the QV house price index, the average outstanding mortgage balance is in the high $200,000 or low $300,000 range – about half what National says it is.
The Herald has reported on this for some time. There’s no regular data on average mortgage balances. In 2023, when National was also using a slightly inflated ($500,000) mortgage figure, the Herald reported Stats NZ data showing the average mortgage was just $260,000. You can use other data, from Stats NZ, which shows that in 2023 and 2024 average mortgage payments were between $2420 and $2630 a month – high, but not quite as high as described in National’s ad, and consistent with lower outstanding mortgage balances.
That data is frustratingly irregular. To get a slightly updated version, you could look at the average size of new mortgages written to owner-occupiers in the past five years. That figure shows that the average new mortgage is just under $335,000. Using National’s interest rate calculations that would mean the “average” mortgage would drop by about $363.
(National confirmed to the Herald on Friday that the mortgage figure did relate to a first home mortgage, not an average for all mortgages.)
Now, an improvement of $363 a month is nothing to be sniffed at, and will undoubtedly boost the coalition’s fortunes, but it’s not quite the slam dunk $600 a week would be. Meanwhile crises in health and other public nag away at voters… was it worth it? Increases in rates may erode any gain.
There are also questions to be asked around just how good lower interest rates are making people feel. Consumer sentiment isn’t great. A vast number of households are on very short mortgage terms, waiting for the easing cycle to bottom out. Those households may be looking to hold on for further OCR cuts, reckoning that interest rates will return to the pre-pandemic norm. They will be disappointed. The OCR isn’t likely to plunge that low again (it was just 1% before the pandemic) and longer-term mortgage rates are more determined by the cost of bank funding than the OCR – and this seems likely to remain costly. That means that these rates — the rates that have driven the Government’s poor polling – might be as good as it gets for most borrowers.
The Reserve Bank’s forecasts include a more immediate dilemma for Prime Minister Christopher Luxon. The Bank has updated its inflation forecasts to show a spike in Consumers Price Index (CPI) inflation this year, which is scheduled to shoot up to 2.7% in the September quarter and be 2.5% in the December quarter. Unhelpfully for the Government, the Bank forecasts labour costs, measured by LCI, to stay around 2%. Once again, wages will lag inflation.
Labour will continue to ask voters whether they feel better off – this data suggests the answer to that for the country’s workers will be “no”. Get ready for a winter of energy price hikes, business closures, and the return of the cost of living crisis. For a Prime Minister whose popularity is already precariously low, and who is already testing the goodwill of his caucus, which is likely to shrink at the next election, it will be a precarious time.
Politicos with a Shakespearian flair like to brand these episodes winters of discontent – Luxon may hope that like Helen Clark in 1999 and Dame Jacinda Ardern in 2018, his winter of discontent will make a “glorious summer” forecast in 2026. But a closer reading of the economics suggests there’s just as good a chance his fortunes may end up closer to the Elizabethan original.
