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RBNZ Governor Graeme Wheeler sees limits to fixed-term mortgage rate reductions

RBNZ Governor Graeme Wheeler sees limits to fixed-term mortgage rate reductions
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Gareth Vaughan

Reserve Bank Governor Graeme Wheeler is suggesting the latest round of fixed-term home loan rate cuts may be nearing its end.

Speaking at a press conference after the central bank issued its Monetary Policy Statement (MPS) yesterday, Wheeler was quizzed about the competitive home loan market. Recently TSB Bank became the first New Zealand bank to introduce a 10-year mortgage, and this week SBS Bank became the first bank to offer a carded fixed-term rate below 5% since mid-2013 with a 4.99% five-year offer.

"There's a lot of competition for lending clearly, and we're seeing reductions in fixed-term rates. (But) I think there's probably limits to how much further that process could go in terms of bank profitability objectives and their funding costs, if you like," Wheeler said.

In its MPS the Reserve Bank points out since last July the average two-year fixed rate has fallen about 95 basis points, while the average three-year fixed rate has fallen by about 85 basis points. Over the same time period, which is since the Reserve Bank last increased the Official Cash Rate, the average floating mortgage rate has been unchanged with a downward trend in swap rates feeding through to the lower fixed mortgage rates.

Wheeler, meanwhile, highlighted the dominance of shorter-term fixed rates in New Zealand.

"At this point you only have 3% of mortgage holders with fixed rate mortgages for more than three years," said Wheeler.

"I think something like 55% of mortgages are either floating or maturing within the next 12 months. So we feel we still have a lot of bite through our monetary policy."

"Over time I think it would be a good thing if we had longer maturities. Over time, in general, as we develop greater opportunity for borrowers and investors in terms of the capital markets," added Wheeler.

The recent trend among mortgage borrowers has been towards fixing. In its MPS the Reserve Bank highlighted that the proportion of mortgages on floating rates or fixed for less than one year dropped to 56% in January from 74% a year earlier.

"The mortgage book overall remains fairly short in duration, with only three percent of mortgages on fixed rates of more than three years. The weighted average time to re-price mortgages increased to 12.0 months in January, up from 8.4 months a year earlier," the Reserve Bank said.

The central bank also said marginal bank funding costs have increased slightly over recent months, but still remain near six-year lows.

"There have been few overseas long-term debt issues by local banks, reflecting that they are well funded by strong deposit growth while credit growth has remained modest."

Meanwhile, Wheeler said bank lending to investors is running at about 35% of bank residential mortgage lending nationwide, and about 40% in Auckland.

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10 Comments

Households can live with 4.9% mortgages just fine.  

What is now of concern is the declining values of their house in nonAuckland areas -   Is it worth paying a long term home loan when the home is losing value.  

http://m.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=11416938

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Ha ha ha ha

 

First he tries to talk down the dollar =  2 cents rise

 

Now he is trying to convince mortgage holders to fix long term - when rates are falling every week all around the globe!

 

Bank funding costs are consisitently lower - and Eurozone only just starting latest round of printing - and China has even bigger plans -  Money is cheap and will be cheaper!

 

Finally -  bank margins have been excessive since 2008  - the chart confirms this - and a return to pre 2008 margins is on the cards -

 

Never mind 4.9 - we could be seeing 4.5 by the end of the year on the best specials

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Interested to know kpnuts, do you actually understand why that "bank margin" is higher i.e. what it comprises and why ? Apolgies if you do, but it just sounds like a polulist uninformed comment on the face of it .

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hi grant -

 

certainly in terms of what it is -  and comprises -  difference between what it costs the bank to access capital and borrow - to what it lends at  -  Yes -  

 

As to why Banks have been able to virtually double thier margins since the first GFC -  i am not sure that some of my thinking wont fit into your populist definition - but always willing to learn more from experts -  hence using  the site!

 

For me - the biggest change with the response to the GFC - was the massive printing and devaluation that happened to flood the market with cheap and easy capital to create much needed liquidity immediately after

 

this has drastically reduced the cost of borrowing offshore - so our banks have access to very very cheap capital - but have not had to reduce their lendign rates to the same degree due to our high base rate costs -  so essentially overall  borrowing costs are more heavily weighted to Globally based rates - lending rates are almost entirely weighted locally.

I imagine there is also a fairly significant impact  - caused by floatign rates bearing little resemblence to the cost of Bowwowing - hence the massive disparity between fixed and floating -   never seen 6 month to 5 year rates below the floating before - but that would not account for the last 6 years as not been true all that time

The banks would argue that new rules relating to bank liquidity / financial stability / and abilioty to withstand a similar GFC style event are justifying their need to have greater margins and build reserves - and this may even have an element of truth - --- 

Whilst i dont hope to realy understand it  all -- not being an economist -  i understand enough having owned and managed businesses for many years  -   that withoout true competition - banks just like the rest of the business world will maintain the highest levels of margins they can hilst still staying competitive and maintaing market share -

 

but as i said -  happy for you to enlighten me further!

 

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Ok let's - you may have complicated it a bit there but some of the factors you mention certainly are relevant but not perhaps in the way you suggest. Prior to the GFC banks could access funds at or below the yield curve (floating or fixed makes no difference - we're either talking OCR/bank bill rate for floating and swap rates for fixed). When I say at the yield curve it might have been 5-10 basis points  above that for offshore funding depending upon the term for the component of funding that the banks have to fund offshore for as NZers do not save enough to self fund. And that 5-10 was also a reflection that for decades banks had been able to safely fund very short term where those spreads over wholesale were the cheapest. Back then, when customers credit standing was also considered generally higher, bank margins in housing and strong business credits such as the better farmers was around 70-120 basis points (bps).

  During the GFC all that changed dramatically to the extent that for a few weeks banks couldn't get funding from anywhere at any price. When they finally could they paid a huge price for it - they rightly funded what they could much longer- term - 3,5 & 7yrs rather than the previously typical 90 days. The RBNZ demanded that too, but irrespective the banks recognised that the world had changed dramatically and would have anyway. But instead of paying 5bps  over wholesale, for the next 2-3yrs they were paying for, and locking in long- term funding at costs of 200 bps plus (one bank paid 280 bps at one point),   Since then U.S, Japanese and now euro QE  programs have flooded the world with liquidity and the replacement funding they're now paying has fallen slowly over the past 2-3 yrs and is now just under 100bps and their average overall probably just above that - bear mind though, 100 plus basis points now compared to almost zero prior to the GFC.    So when you look at a graph like that one, where bank margins seem to be around double what they were prior to the GFC, remember that at least half of it is the funding spreads they're still having to pay - indeed right now, when you take out that funding cost, bank margins on the large high credit businesses, and mortgage market lending, are back to where the were prior to the crisis. Competition between banks for that business is probably even more aggressive  than it was prior to the GFC with many obviously quoting on the basis that they expect further falls in their funding spreads to justify the business they're bringing onboard currently at effective rates to the banks now below the previous 70-120 bps - one I saw this week, effectively a net 30bps to a small/medium sized business

 

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thanks Grant

 

i certainly recall the problems accessing any capital at all for that short period -- and yes some of those high costs will have filtered through in overal margins for a period of years -  casuing a slight buldge over the 3-7 year period -  but hard to see how that short window - 6-12 months is still having the same impact now -- after all we are 6+ years and the majority of borrowing will have been at the shorter end of the 3 -7years and should now have passed through.

 

given that your explanation  for the 200 point difference reflects a very short period -  would that not be spread out over the followign years and therforethe overall margin diluted  - ie six months at 200  6 months at 100 and 4 years at 70 -  averages out at 86?

 

Going by your theory -  we should be looking forward to 10 years of extremely low rates - and lower margins  -   5-7 based onthe current and very recent money supply conditions and another 3-5 based on predicted and announced quantitive spending programs.  However somehow i doubt this will be the case if the market tightens again - generally these costs are passed on almost instantly!

 

taking your points explaining that current costs - also reflect much higher margins and fundign spreads today - as one justification for the change in overalll spread and margins - may be a more technical and insider informed point of view - but ultimately is the the same as my populist opininon-    the banks are workign of higher margins now and have been for a few years -  evidenced not only by these graphs  but their ever increasing profits.

 

Finally --  given that morgagee sales have dropped to almost zero in the last year -  and business conditions are some of the best we have ever had - its hard to see that the current credit worthiness environement -- and future prospects in NZ are not some of the safest that the Country has ever seen for leaders -

 

but thank you for some of the insights into the longer term effects of the funding squeeze and marginn lendign changes

 

cheers

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The problem is knuts, it wasn't a "slight bulge", and only 6-12 months. It was a massive 5bps up to over 200bps plus move over 4yrs from 2008 to 2012. A big rise on the US part of the crisis in 2008/09 before US QE kicked in, then a modest retarcement, then another massive rise back well above 200bps in 2010/12 during the European crisis until the ECB threaten to do their own QE. So basically 4 years of banks locking 3-7yrs money at 200 plus bps cost.

 

That pushed their average funding spreads up to around the 150bps point region and that is now very slowly coming back down (one of the downsides for those fixing and locking in those spread/margins, unless they're able to use swaps to fix which of course the retail mortgage market can't) - that back of the envelope 86bps you mentioned would be in the ball park now as an average I would guess too, but eitherway it isn't the 5-10bps before the GFC hence bank "margins" appearing to be double what they were when in fact their net margin over their funding cost in truth is back to roughly where they were earning it prior to the GFC.

 

But you're right that this trend of lower funding costs will continue to bring that average down (barring a crisis and even then that would take a long time to hurt because of their long-term funding), and if the OCR & swap rates stay down at these levels, the cut throat competition between banks while the economy is strong should see lower rates even without an OCR cut which I doubt. That's on the basis of all other things being equal, and of course other things don't always stay equal and thats the dilema for all forecasters, and personally I think we're going to see plenty more volatility and surprises over the next few years

 

 

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A surprise decision this week by Britain to join China’s new development bank for Asia, despite opposition from the Obama administration, will almost certainly encourage other American allies to become members, particularly Australia and South Korea, analysts said Friday.

Britain’s announcement Thursday that it intends to join the Asian Infrastructure Investment Bank, which China is largely funding in hopes of becoming the dominant influence in Asian affairs, has bolstered the fledgling bank’s reputation even before it begins operations, the analysts said.

 

Will NZ sign up?

 

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Anyone who buys shares or uses a Hedge fund or is in a super fund should watch this

 

https://www.youtube.com/watch?v=yzOayvHt_zw

 

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Of course its rigged...

Hence dont play their game

 

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