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Reserve Bank's monetary policy strengthened as more move to floating mortgages; most in 5 years
The Reserve Bank of New Zealand's monetary policy, or its ability to control consumer spending and inflation through hikes or cuts in the Official Cash Rate (OCR), gained more potency throughout 2009 as the proportion of home loan borrowers on floating mortgage rates hit its highest level in almost five years.
Figures released by the Reserve Bank (RBNZ) show the proportion of home loan borrowers on floating mortgages reached 24.4% in November 2009, its highest level since February 2005, and up from a low of 12.5% in August 2007.
The Official Cash Rate's biggest influence is on short term interest rates in New Zealand, meaning a hike or cut in the OCR quickly flows through to variable and shorter term fixed interest rates. A borrower on a floating mortgage rate would generally be hit by a 25 basis point (0.25%) hike in the OCR with the same increase to their floating rate.
In turn, this would mean the borrower would be forced to spend more on interest payments on the loan, which would (desirably for the RBNZ) have a negative impact on the borrower's other spending. The RBNZ's number one mandate is to keep inflation between a specified target range over the medium term. Effectively, if a borrower is forced to spend more on their mortgage (or other forms of borrowing) and less on other items, this would reduce their demand for these items, dampening inflationary (upward) pressure on prices.
The proportion of borrowers on floating mortgages in New Zealand began a sharp rise around October 2008, following the bankruptcy of investment bank Lehman Brothers in the United States in September. This threw the world economy into a tailspin, with central banks worldwide slashing official interest rates as the supply of credit on financial markets dried up.
In New Zealand, the RBNZ had begun cutting the OCR from its record high 8.25% in July 2008 as the housing market cooled and wider economic activity continued to contract (the New Zealand economy was in recession, or negative growth, from the beginning of 2008 through to mid-2009).
The RBNZ stopped its easing cycle for the OCR after April 2009, once it had reached a record low of 2.5%, and has left the rate there since. At the time, the RBNZ also said that it expected to keep the OCR "at or below its current level until the latter part of 2010," although this wording had changed in its latest monetary policy statement to "around the middle of 2010," as economic growth prospects for New Zealand gradually recovered.
Before the RBNZ began cutting the OCR in 2008, variable mortgage rates offered by banks in New Zealand sat above fixed rates, encouraging borrowers to lock in fixed rate home loans. However, as the OCR was cut, variable mortgage rates became cheaper and more inviting to those purchasing new property and those rolling off fixed terms.
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Despite cuts in the OCR from July 2008, the average bank variable mortgage rate remained as high as 10.64% until the first week of September, when banks began to pass on the OCR cuts to borrowers. Meanwhile, at the start of September 2008, average bank fixed rates ranged from 9.05% (three years) to 9.72% (six months).
The average bank variable rate is now 6.01%, with only the average six month rate below it (5.82%). Longer term fixed rate averages range from 6.2% (one year) to 8.68% (five years).
The Reserve Bank's 'expectation' that it will keep the OCR at 2.5% until the middle of 2010 has given borrowers a degree of certainty that variable mortgage rates will not begin to rise until around the same time as the OCR does, although when this will be is drawing some debate. Wholesale money markets are expecting the RBNZ may have to hike the OCR as early as March or April.
This Credit Suisse/Bloomberg index (link here) shows markets pricing the OCR at 207 basis points (2.07%) above where it is now in a year's time. This should take the average bank variable rate above 8% in a year's time.
By opting for a variable mortgage rate (or by having part of a mortgage on a variable rate), borrowers now are experiencing lower rates than those who have fixed. Having a loan on a variable rate also means a borrower can pay back more than what would be allowed on a fixed rate, giving them the ability to pay the loan off faster.
But while variable rates may stay low for a few months yet, fixed mortgage rates (including six month rates) have been on an upward trend in recent months. The danger here for borrowers is that when variable rates do rise and a decision is made to fix for a term, fixed rates may have risen further from where they are now.
An overview of Monetary Policy in New Zealand can be found here on the Reserve Bank's website.
24 Comments
Well for whatever reason, Westpac
Well for whatever reason, Westpac is forcing farmers in the opposite direction, they are quoting a floating rate of over 10%, yet a short term fix of around 6.2%. The cost of fixing adds a few more points of course. This has been going on for over 9 months that I know of.
Alex - I appreciate the
Alex - I appreciate the extra mojo caused by more borrowers being encouraged onto floating, however can you help Roelof and I with this concern please? Why can't RBNZ be more definite about the effect medium to long term?
http://www.interest.co.nz/ratesblog/index.php/2009/12/29/summer-chart-se...
"Thinking through the automatic stablizer effect, eg. credit demand increasing; it looks like banks will have to jack-up deposit rates to maintain the "˜non-market' component toward approx. double (what I think is) the market component "“ so savings increase and up goes mortgage/loan rates with it. Which backs up, to a degree*:
"The core funding ratio in the new prudential liquidity policy drives banks to either* compete for more stable funding from non-financial customers, or* borrow in wholesale* markets for terms longer than one year. During periods of rapid credit expansion, banks will not have the same ability to borrow at short terms in the offshore money markets to supply domestic demand. To satisfy growing credit demand, banks will need to borrow from a variety of sources, with increased emphasis on customer deposits and longer-term markets. As a result, lending rates should automatically move higher without the Reserve Bank necessarily needing to move the official cash rate to the same extent. With short-term wholesale market rates not likely to rise as much, the attractiveness of the New Zealand dollar as a destination for "˜carry trade' investors could be reduced. Through these channels, the policy has the potential to have a role in assisting monetary policy."
Except * if they can get the easy-rate stuff, (the either and or) they will, so you are casting some doubt in my non-expert mind nonetheless and so it might help if they said, "..lending rates WILL automatically move higher.." and, "the policy WILL have a DEFINITE role in assisting monetary policy." But it seems they can't, maybe for the reason/market option* you highlight. Although you'd have to ask why would offshore rates get easier, and thence where is demand for NZ Inc's products? Hmmm, but maybe a Greenspan, Freddie, Fannie and Bill Clinton consortium, somewhere, somehow, might ride again perhaps and that's why RBNZ seem only semi-confident? [Hence] The coulda, shoulda tone [language, hopefulness] and "potential role", instead of "definite role, in asssisting monetary policy."
Cheers, Les.
Floating mortgage rates will remain
Floating mortgage rates will remain well under 6% throughout 2010 - there's a prediction for you!
<b>Brilliant </b> Bank Manager !
Brilliant Bank Manager ! .....Mine is for Goldmoney Sacks stock to rise by at least 50 % , to over $US 250 by year's end . Trying to ger Bernard interested in compiling our 2010 predictions for a " brick-bats & bouquets " celebration on 31/12/10 .
TBM - I'll rationalise that
TBM - I'll rationalise that on the basis of AB keeping his hand on the tiller of the increased core funding ratio phasing from 65%, thro' 70% to 75%, but once 'stabilised' there, any ideas of how things could play out after that re. the concern stated in my comment above, please? Cheers, Les.
The time to fix was
The time to fix was FEB/MAR 2009.
enjoy low floating before it starts to rise again
Would be very interesting to
Would be very interesting to see 2010 housing market and interest rate predictions from Bernard Hickey, Kieran Trass, Tony Alexander, Cameron Bagrie, Rodney Dickens Alan Bollard, Brendon O'Donovan etc.
Last year all had made predictions for 2009 by about the 9th of January and they could were all wrong. http://tinyurl.com/yaj34lo
Will they be brave enough to make a prediction for 2010?
My thoughts - house prices were up 9% in 2009 so 2010 should see at least 12%. Fixed interest rates will stay about where they are throughout 2010 and floating will remain under 6% - the overall level of confidence should be pretty strong and there will be a massive net migration gain.
The only tax change I see coming is top personal rate down to 30% and maybe a lift in GST to 15% to compensate.
C'mon interest.co.nz - start a 2010 predictions thread and interview the "experts".
I see a house price
I see a house price poll has been started on the site at the top right. So far 57% of people think prices will be the same or increase by up to or greater than 10%
Yeah Alex / Bernard :
Yeah Alex / Bernard : Get the Prognostications of 2010 thread up and running . All these in-house experts / clever dicks & me , utilise the talent .......... Should be good for a laugh . [... my tip above , at 9:09 p.m. ]
Bank Managers got it sussed-
Bank Managers got it sussed- thats what I think too , plus my prediction that the govt is aware of a huge oil find in NZ . This will allow Minister of Munny Billenglish to pork the barrel so hard it wont be funny- why else is he comfortable borrowing $250 million a WEEK !
There we go , Alex
There we go , Alex . The tips from the informed , the wise , and from me as well .
TBM et al, My predictions
TBM et al,
My predictions dependant on policy:
No policy changes = 0% growth over 2010.
Interest rate rises = 5% drop for every 1% rise in OCR.
Tax changes = - 5% to -25% depending on changes adopted. 90% chance of something happening here, most are in agreement of the ruinous impact the untaxed housing speculation is having on NZ economy.
facto in possible double dip recesiion overseas and further credit tightening - anyones guess, but further drops would be expected.
all in all, your money is better off elsewhere. I see my stocks are now up 60% from february (exc dividends), good late december run added another 10%. Focus on income v price, whatever asset you are looking at. there might be some good ppty buys out there, but in the main its rubbish. Look to put more into TDs as rates rise, I am doing that now with 6.8% in Aus.
I predict prices will stay
I predict prices will stay the same or increase slightly even if the OCR increases by 1-2%. However I expect food prices/energy costs etc to continue to rise rapidly so inflation is likely to be around 3-4% which means house prices will actually go down slighly in when you take that into account. People in NZ seem to have a large appetite for debt and I think it would take rates of 10%+ to convince them otherwise.
Getting all these predictions noted
Getting all these predictions noted down , Alex .?............Halloooooooo , anyone skipperiing the ship today ?
Where does the wholesale market
Where does the wholesale market get it's info from to back a rise in the OCR as early as March or April? As far as I can tell, there are no inflationary pressures that are going to change any RBNZ tactics in such a short space of time. It's January already.
I agree with The Bank
I agree with The Bank Manager about shorter term house price increases. As long as the number of people on sub 6% floating rates is rising, prices will climb. What I'm not so sure about is exactly when the floating rate will rise and people will be caught out with nowhere to run.
So who among the great
So who among the great unwashed here run businesses? Floating is not 6% for this crew as I understand it. Lets hear them. I am quoted over 10% for my farming operation. I have equity of around 90%. Westpac. I am sick of all this chatter about housing, exporting earns us the money to fool with housing. So what are we all paying? And why so steep to keep it floating?
One of the great ironies
One of the great ironies ( or rip-offs ) of banking Farmer Will is that cashflow positive businesses [ commercial property / farms / industry ] require greater deposits , and pay higher interest rates , than over-priced residential shoe-boxes in the suburbs .
Farmer Will, Roger - it's
Farmer Will, Roger - it's a no brainer from a banking point of view, and it is baked into the relevant Basel accords/regs in terms of asset risk weightings, which didn't surprise me when I saw that in the RBNZ papers I was looking at recently, However if you were operating in North Dakota, FW, things might be different for you. Idea, talk to FF about starting your own FF bank, a sector bank, farmer workingand banking for farmers, rather than farmers working for bankers. It could be done, especially given the financial dynamics of your sector. I think people people like you would benefit. Best of luck, Les.
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Usually as a farmer I
Usually as a farmer I pay a bit less than a percentage over and above housing. Even rental housing (another commercial business). So why is it currently 4 percentage points for floating?
So heres my theory. And thankfully I fixed most of my noose back in March. Number one they are struggling to find long term funds, Number two with the profits from floating they can rebuild their stake, Number three, when these interest rates take off (and I have no theory on that)they can sock it to us and make up for the losses on the high short term funds they will have to find and use to lend on what will be low long term rates that have been available.
Les you have probably raised a very good idea. However I am not a member, and when I look at some of the heirachy I would rather go play finance with Westpac.
Farmer Will - oh, for
Farmer Will - oh, for improvements to legitimacy and trust in/for/by the fair people of 'Girt-by-Sea'. Shame. How to fix? Anyway, best of luck, Les.
We all know that the
We all know that the banking sector is currently giving the farming industry the wide berth at present so if you are a farmer and want their funds it's going to cost you. They don't want to lend against what they percieve as plummeting rural land values.
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