A financial expert doubts the Reserve Bank is going to raise interest rates too much despite growing inflation, because it'll destroy the housing market.
Interest rates are at record lows, driving up house prices and making it cheap to borrow. They were already relatively low, encouraging spending in the post-global financial crisis years, but fell to 0.25 percent as COVID-19 hit last year.
As a consequence, house prices skyrocketed - Kiwis seeing it as a safe investment as stock markets fluctuated.
Mark Riggall of Milford Asset Management told The AM Show on Thursday despite prices doubling since before the global financial crisis, repayments have remained about the same.
"The monthly repayments on those mortgages are actually the same, if not lower. We've enjoyed a huge benefit of falling interest rates, but of course we have to pay more in mortgages."
But mortgages often last for decades, while interest rates can be changed a few times a year - in either direction. One of the Reserve Bank's primary goals is to keep inflation around 2 percent - lowering interest rates stimulates the economy but tends to raise inflation, as supply constraints start to bite. Raising them cools demand, lowering inflation.
"Inflation is running reasonably hot at the moment," said Riggall.
The official statistic is 1.5 percent - within the Reserve Bank's target, but on its way up.
Some banks are picking the official cash rate to go up next year to 1.25 percent. While that is still low by historic standards, it's four times higher than it is right now.
Riggall said with prices so high, many recent buyers are stretched to their limits already.
"If interest rates rise, if you're borrowing against the median home in New Zealand and rates rise 1 percent, that could cost you more than $4000 a year in extra repayments. For some people it's going to be difficult - bear in mind that other costs are going up as well."
Based on long-term fixed mortgage rates, Riggall said the banks appear to be expecting a rise of about 0.4 percent in the next 12 months. But whether the Reserve Bank will go further than that remains to be seen.
"If they do raise them the costs are going to go up, the housing market's going to fall over - especially at the bottom end - and people are going to have less money to spend on the rest of the economy."
The next review of the official cash rate is on July 14.
