Dileepa Fonseka writes on business and politics.

OPINION: Economist Leith van Onselen of Australian blog Macrobusiness has an idea what the headline of his next post might be: “The Reserve Bank of New Zealand is going to kill the Government”.

Australians and others around the world currently have their popcorn out and webcams focused on the canary down the coal mine that is the New Zealand housing market.

They seem to be waiting for the canary to not just be overwhelmed by fumes, but engulfed in flames.

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“New Zealand’s probably the one country that’s even more housing obsessed than Australia,” van Onselen says.

Obsessed to the extent that the housing market has swallowed the economy, last year the value of New Zealand’s housing stock surged to nearly five times New Zealand’s GDP.

For context, Australia’s is not much better at just over four times, but the United States has housing stock valued at closer to twice its GDP last year.

Any downturn in the housing market is going to be painful, even if prices still stay 32% above where they were before the pandemic, as Treasury predicts.

Van Onselen argues people will get grumpy as house prices fall even if those prices are higher than they were before the pandemic.

If you have trouble understanding why, van Onselen asks you to imagine going from an iPhone 3G to an iPhone 13, then being forced to downgrade to an iPhone 5.

Or, in housing terms, you got used to those thousands of dollars in net worth you had to your name, and now you’re not too happy all that money has evaporated.

Van Onselen argues the backlash to rising interest rates and falling property prices is already underway.

Labour had a double-digit lead over National in most polls until December, but that month was when the Real Estate Institute of New Zealand’s house price index went into reverse.

Month-on-month house price increases turned into decreases. On the Reserve Bank (RBNZ) side, the official cash rate stayed at 0.25% until October when a rapid rate-hiking cycle began.

The cash rate was raised by 25 basis points to 0.5% then another 25 basis points in November to 0.75% and the OCR now sits at 2%.

Although this flowed through to bank mortgage rates, between March 2020 and November 2021 – more than a year – the average floating mortgage rate never went above 4.8%.

But in the six months after November that average floating mortgage rate increased by 15%, from 4.8% to 5.5%.

After Covid-19 hit, the RBNZ had brought in an ultra-low official cash rate to ward off the prospect of a Covid-induced recession, along with other measures like a multi-billion-dollar programme of quantitative easing and a funding for lending initiative.

By the second half of 2020 it was clear this was a mistake because Covid-19 wasn’t like the global financial crisis or a confidence-draining disaster like the September 11 terrorist attacks.

Industries like tourism and hospitality struggled, but others could continue to operate and the financial system didn’t seize up.

People weren’t able to spend on big-ticket items like overseas holidays, so accumulated savings which they spent on goods or invested.

Some took advantage of those low interest rates and were willing to pay ever-increasing prices for houses because they feared prices might rise even further if they didn’t.

Arguably, interest rates should have been raised to pre-pandemic levels a lot earlier, which would have cut off the need for steeper rate hikes now.

The official cash rate reached its pre-pandemic level of 1% only nearly two years after the country went into lockdown, and well after rising inflation took hold.

Quantitative easing ended only halfway through last year and the funding for lending programme – which effectively provides cheap credit to banks to lend to others – is still active.

Van Onselen bets the sight of economic chaos overseas means the Reserve Bank of Australia won’t follow through with its plans to hike interest rates, but sees strong language from the RBNZ as an indicator it will – which could take $1000 or more per month out of household pay packets in higher mortgage repayments.

“That’ll bring your inflation down a bit, but at the cost of spiking unemployment and raising everybody’s cost of living massively, and so much so that your consumption crashes.”

It’s worth remembering property prices also started to decline in the months leading up to Helen Clark’s defeat in 2008.

Bill Clinton’s strategist James Carville once said “it’s the economy, stupid” as the main thing Clinton should focus on to get elected. In a New Zealand context, you could change that to interest rates and house prices.

In other words, Prime Minister Jacinda Ardern’s political fate may well lie in RBNZ Governor Adrian Orr’s hands.