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Opinion: Stop worrying. There's plenty of low mortgage rate stimulus still to come
By Rodney Dickens
The RBNZ fired a warning shot at the banking sector yesterday. "While some banks had passed on recent OCR reductions it was "fair to say we have been disappointed with the response to date," Deputy Governor Grant Spencer said at the release of the latest Financial Stability Report in Wellington."
Tony Alexander offered an explanation for the lack of response by the banking sector yesterday. "It now costs us banks far more to borrow money than in the past because of the huge losses racked up by the Northern Hemisphere banks," Alexander said.
"This means for instance, as we have noted many times before, whereas we used to pay a premium to offshore investors about 0.1% above the bank bill yields and swap rates you might see, now we pay premiums near 2.5%. This means that as old funding rolls off it gets replaced with much more expensive money. If at the same time as this old money is rolling over the central bank cuts its cash rate the cost to a bank of funding its lending may not go down," he said.
With many individuals and firms suffering, it is easy to have sympathy with the view that banks should have passed more of the OCR cut through and be willing to accept more shrinkage in margins and profits.
It raises issues about whether there is enough effective competition in the banking sector although it was pleasing to see the RBNZ's warning shot had some impact yesterday with Westpac, Kiwibank, TSB and AMP trimming some mortgage interest rates today.
The cuts in mortgage interest rates since April 30 have been focused on the 6-month to 2-years fixed rates with floating rates remaining stubbornly up to 1% above 6-month fixed rates. Based on the March 2009 data released by the RBNZ, the banking sector has $35.2b of outstanding floating mortgage loans at an average interest rate of 6.63%.
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If the banks had cut the 6.63% by 0.5% to 6.13% it would deliver a NZ$176 million drop in interest costs to floating mortgage borrowers. This is worth a bit of argy-bargy, but it is dwarfed by the cut in interest costs in the pipeline for numerous mortgage borrowers over the next year at least.
More important is the NZ$1.2 billion cut in mortgage interest costs over the next year
As at March 2009 the banking sector had NZ$55.3 billion of outstanding fixed mortgages to be re-priced over the subsequent 12 months with an average interest rate of 8.16%.
If mortgage interest rates remain at around current levels for the next year, which the RBNZ seems committed to achieving, and people roll the maturing $55.3b into a mix of 6-month to 3-year fixed mortgage interest rates because these rates are lower than either floating rates or 4-5 year fixed rates, then this group of mortgage borrowers could be NZ$1.2 billion better off.
Inevitably a reasonable portion of this increase in disposable income will be spent.
There is another NZ$33.6 billion of fixed mortgages with an average rate of 8.46% coming up for re-pricing over the subsequent 12 months. If the economic recovery unfolds as we expect, the OCR and mortgage interest rates will have increased at least moderately by then but it is still likely that this group of borrowers will experience a reasonably significant drop in interest costs.
So even though banks are in part using the drop in the OCR to protect margins from eroding in response to rising funding costs "“ a la Tony' comments "“ there is still a massive interest rate stimulus to hit the pockets of a significant group of mortgage borrowers.
As at March 2009, 22.7% of outstanding mortgage loans by banks were floating, 35.6% were fixed with less than 12 months to run, 21.6% were fixed with 1-2 years to run, 11.1% were fixed with 2-3 years to run, 5.4% were fixed with 3-4 years to run, 2.6% were fixed with 4-5 years to run and the remaining 0.9% either had over five years to run or were unallocated.
The implications of the massive interest rate stimulus still in the pipeline
As covered in our Housing Prospects and Building Barometer reports, the housing and residential building markets respond reasonably quickly to interest rate changes. Most people buying an existing house or building a new house have to borrow more money and so face the current market interest rates. The housing market is still to benefit from much of the drop in mortgage interest rates to date but won't get much of an added kicker as people have their existing fixed mortgages re-priced to lower rates.
However, while someone who borrowed money to buy a house two years ago and fixed for two years is unlikely to shift house again just because his/her mortgage interest cost drops, he/she will experience a significant improvement in disposable income and is likely to spend a significant proportion of the increase. The retail sector should be the major direct beneficiary of the massive interest rate stimulus still in the pipeline, while it will then drip feed through to the manufacturing sector and a wide range of service industries.
_________________
* Rodney Dickens is the Managing Director and Chief Research Officer for Strategic Risk Analysis (SRA), which is a boutique economic, industry and property research company. Rodney produces regular free reports on topical issues and on specific property markets. Find out more about SRA here and sign up to SRA's free reports here.
I have read this report
I have read this report from Rodney Dickens searching for a comment about the reduced % of valuation which the banks will loan out. I find nothing! Mr Peasant may well think he can refinance his $400000 100% mortgage and be enjoying a pocketfull of extra cash thanks to Bollard's games with the ocr, but hang on a bit, the bank will demand a new valuation be made and offer only 80% of that new amount. Even if the property has not fallen in value( which is doubtful) the amount of the new mortgage will be $80000 less. Where is Mr Peasant going to get the $80000?
Lets drop the valuation by the national average, at least 10%, that brings a valuation of $360000 minus the $72000 the bank will not lend due to the higher risks in this RECESSION and we find Mr Peasant can get $288000. Of course the bank will ask for the missing $112000. Ooops.
The 20% deposit is a
The 20% deposit is a myth. You can easily get 95% loan on your home, sometimes more from reputable lenders.As long as you keep paying your mortgage, the bank will not ask for it back.
“It now costs us banks
"It now costs us banks far more to borrow money than in the past ......." Alexander said.
I hope Tony has a better grasp of Economics than English (the language, that is, or perhaps both!)
"the bank will not ask
"the bank will not ask for it back" don't believe you.
Wally - unless there's a
Wally - unless there's a statutory top-up clause in the mortgage agreement, there's no grounds for the lender to ask for the money back. My understanding is that such clauses are pretty much nonexistent for residential mortgages.
So if a bank lends
So if a bank lends out $400000 on a property valued in 2007 at that amount, the bank cannot refuse to lend the same amount when it comes time to refinance?
Check the small print -
Check the small print - I suspect you will find that the bank can opt out pretty easily...and they will if they want to.
Wally I am with you
Wally
I am with you on that.
As per govt predictions(which is conservative) there are going to be another 60,000 jobs lost.(NZ institute thinks11%) Youth unemployment is at 20% and these are the people who are going to buy the houses of tomorrow.This employment figure is going to get worse for a few years before starting to improve.I don think most kiwis know how much more money is going to be sucked off from the financial world before things will improve very slowly.
Brian Gainor wrote an article for the Herald of how the baby boomers will soon be offloading 3000-5000 houses each year from 2011.As Gareth Morgan said in last months Listener lot of kiwis seem to do the dayjob to keep them out of prison and drugs and make money in property. Of course this is an exaggeration but the obsession with property is unbelieveable.All the money has gone into servicing non-productive property sector.
We badly need to get rid of LAQC, have a nominal CGT and increase the mortgage rates for the multiple property holders.This will set us back for a few years but will be good for future with money flowing into productive sector and help more people have a home. Then the young of today may have a future. Otherwise those bought before the boom with no debt will acquire more properties which is not good for the society.
But capitalism seems to concentrate so much money in the hands of so few. And that is exactly how the wall street/property street want it!
use your most recent valuation
use your most recent valuation to adjust your LVR , you then have two choices,
1) you then have more borrowing power on hand that you can surrender back if required, or
2) use the equity of unencumbered properties from the process, so that they can be given as additional equity in the future if required
the banks as a rule are not interested in your net worth, as they can change that with a mortgagee sale, they are interested in your ability to keep up with interest (&p) payments.
they are there to make/take money. if you can not play the game you piece will be removed from the board.
That's just great President property,
That's just great President property, but what about the normal peasants out there. Not the lords who own more than one place. My point is about the suggestion that by lowering the ocr the RBNZ is saving mortgage holders money when they refi on cheaper deals. I understand the banks have an 80% of valuation ceiling. If so, and considering the fall in values, the average peasant is not better off at all.
If I am wrong, please name the banks offering more than 80% and even better the ones that will lend on 2007 valuations.
"If I am wrong, please
"If I am wrong, please name the banks offering more than 80% and even better the ones that will lend on 2007 valuations."
I thought banks would continue to lend (refinance on your existing mortgage) if youve been paying it and not having issues. They are simply interested in ability to pay, if you have that why would they even bother to look at valuation, thats a shortsighted view, they know long term (20-30yrs) property will be up.
"....long term (20-30yrs) property will
"....long term (20-30yrs) property will be up."
Look at the Japanese property market. They have nearly gotten the first 20 years (from 1990) of that comment out of the way with a FALL in property prices! And this from an economy that was the Shining Star of the 1st world, when I was growing up.
I held Deutschmarks in 1990 , waiting for a profit. That currency doesn't even exist today !! What has gone before may, or may not, come again
I remain confused. Quite normal!
I remain confused. Quite normal!
Are there any banks offering to refinance existing mortgages in full at lower rates even if the exisiting mortgage was for 100% of the 2007 valuation?
Unsuprisingly, Wally, I would imagine
Unsuprisingly, Wally, I would imagine that there is an element of "Don't poke it, and it won't bite you" going on in the Banks at the moment. They do not want to turn into realestate salesmen.
wally, i do not think
wally, i do not think anyone ever financed 100% on just the property (at least here in NZ), they probably financed on 100% of the equity of the property, plus 100% of any existing home put up as security, and 100% of any personal guarantees of repayment.
you can get 100% all day long on a property if you are willing and able to put your head on the block and everything you own, provided it is a no brainer to the bank.
I don't quite agree with
I don't quite agree with the last paragraph of the article. The author seems to be suggesting that most people coming off fixed interest rates and re-mortgaging at lower rates will spend the difference, boosting retail. Some will of course. But there will be plenty of home owners, especially younger ones, who will instead try and pay more off their principal, or save (especially in these uncertain economic times). Speaking from experience too, I know a lot of people aren't getting anywhere near the same bonuses that were being shed out a year or two ago. Without generous bonuses, which many people have relied quite heavily on the last 5 years, people are going to remain very cautious about spending.
PoP: "the banks as a
PoP:
"the banks as a rule are not interested in your net worth, as they can change that with a mortgagee sale, they are interested in your ability to keep up with interest (&p) payments.
they are there to make/take money. if you can not play the game you piece will be removed from the board."
Very well put....
Wally :
"That's just great President property, but what about the normal peasants out there. Not the lords who own more than one place."
The banks are a business, if ppl need a hand out , thats where Work and Income come in.
Wally:
"I remain confused. Quite normal!
Are there any banks offering to refinance existing mortgages in full at lower rates even if the exisiting mortgage was for 100% of the 2007 valuation?"
PoP:
"they are interested in your ability to keep up with interest (&p) payments.
they are there to make/take money."
In other words if you can afford to continue to pay for something, worth less than you owe on it...not a problem.
Which again brings us full cicle to the old orginal RB policy of 20% deposit to protect silly ppl who want to own but cant afford it if things, as they always do..Murphy.. turn belly up...
And lets face it real valuations are around 15 to 20% down now...IF a 20% desposit was still required this conservation would not exist would it?
I clearly remember banks offering
I clearly remember banks offering 100% mortgages on properties. I recall offers of 105%. Can anyone please answer my last question re the refi situation.
I can confirm i have
I can confirm i have a friend that took out a 100% mortgage on a property 2 years ago - from memory he had to take out 2 mortgages totalling the 100%. Now he has lost his job and is on the dole so imagine the house will be on the chopping block if he cannot find a job soon.
Wally, Westpac bank will lend
Wally, Westpac bank will lend you easily 95% of home value, and NZF (or something). Bought house months ago. Was dealing with mortage broker though, not banks directly.
Steptoe, when you comment "And
Steptoe, when you comment "And lets face it real valuations are around 15 to 20% down now"¦IF a 20% desposit was still required this conservation would not exist would it?"(sic)
What do you mean?
The evidence from the US
The evidence from the US is that when confronted with recession/rising unemployment punters are finally choosing to save/pay down debt when given windfalls through either lower mortgage rates or tax cuts - witness the falls in retail sales reported from the US overnight. Rodney is being far too optimistic in terms of retail.
wally, i believe steps might
wally, i believe steps might be saying that if we had/have a 20% deposit it doesn't matter if properties fall 20% (their valuations) because 100% of the sale price would cover 100% of the debt, or if remaining unsold/kept in ownership as long as interest payments were being made the bank is happy as there is no real risk exposure as far as equity, the only risk being payment default, in which case they can just call in the cleaners...
Wally, you're right you may
Wally, you're right you may struggle to refinance an 80% + mortgage if looking to change banks (though sounds like Shaun's broker may still be able to assist) but by and large if a borrower has fixed rate loan is expiring, be it at 80% or 100%, and they want to stay with their bank, they will not be asked to stump up with an extra 20% to reduce the LVR to 80% . Banks have commited to lending over 20 + years and they're not about to alienate good customers who pay their mortgages on time.
Rodney. <blockquote> The retail sector
Rodney.
Can you please explain how providing an amount of interest rate savings to househod borrowers less than that taken from savers via lower deposit rates is stimulatory of the economy?
Borrowers are people or businesses in debt - some are already insolvent - and if they have an ounce of sense they won't be spending any reduction in interest payments but using it to reduce that debt.
Depositors have a surplus of capital so are in a position to either spend what they receive in interest after tax (and tax revenue is short at the moment) or to invest it.
the proportion of borrowers to
the proportion of borrowers to savers is not necessarily equal, nor the amounts involved, however as for borrowers IMHO i agree most will reduce debt where possible, hunkering down until the storm settles - some even making sure they are not in the eye of the storm before they leave the safely of their shelter (gold, oil, cash etc)
All I can say is
All I can say is Spencer and Bollard have run out of ammunition, the banks will keep firing bullets not blanks like the RBNZ.
# janet Says: May 14th,
# janet Says:
May 14th, 2009 at 1:37 pm
"It now costs us banks far more to borrow money than in the past "¦"¦." Alexander said.
I hope Tony has a better grasp of Economics than English (the language, that is, or perhaps both!)
Tony has not been not particularly bright in English and Math at school,
but excelled in fairy storytelling; he is favorite one was about fractional reserve banking and fiat money. That is why I have sent him to New Zealand to keep the spirits of the Middle Earth going at my little franchise BNZ.
Wally Says: "Steptoe, when you
Wally Says:
"Steptoe, when you comment "And lets face it real valuations are around 15 to 20% down now"¦IF a 20% desposit was still required this conservation would not exist would it?"(sic)
What do you mean?"
The Ave value drop doest represent the true drop in the sale price of the housess....due to a high % being sold, at prices 60 to 200%+ above the national ave, (60 to $700K + )even thu they are selling some 15 to 20% below2007 prices.
And the below ave homes also selling 15 to 20% below 2007 prices, but these drops are only 40 to $80k.
To illustrate...
If one takes a real house, that has for the last 20 yrs sat close to the national ave during this period...in 2007 would have sold for about $425k, and sold it today, it would sell for $310k to $320K a lot more of a drop than what the national ave of 9% indicates.
There is reality, and then there is the stats... of a market in turmoil which has distorted the stats.
And if the market had not been freed up by removing the regulated 20% deposit, then those who are stuck with over priced houses would at least still have a 100% loan rather than a 120% loan now.