By Bernard Hickey
The Reserve Bank of New Zealand has again held the Official Cash Rate(OCR) at a record-low 2.5% as expected, but has warned it will increase it to 4.75% by early 2016. That would lift variable mortgage rates to 8% by then.
The bank said economic growth was showing "considerable momentum" and was becoming "increasingly self-sustaining." It said it needed to withdraw the stimulus of very low interest rates through 2014 and 2015. It forecast the Official Cash Rate would rise from 2.5% to around 3.5% by the end of 2014, with rate hikes starting in March or April.
Reserve Bank Governor Graeme Wheeler emphasized his plans to tighten monetary policy by being unusually specific about future rate hikes in the news conference after the release of the bank's quarterly Monetary Policy Statement. He said he expected the OCR to rise by 2.25% within the next two and a quarter years.
The banks said it was monitoring how its 'speed limit' on high Loan to Value Ratio (LVR) mortgages was affecting the housing market and repeated that it hoped it would slow inflation by 1% to 4%. Wheeler has said the bank would need six months to know how much the limit was slowing house price inflation. The bank said the impact was in line with its forecasts from what it had seen in its first two months of operation.
What does this mean for rates?
The Reserve Bank is essentially warning borrowers to expect mortgage rates to rise over the next couple of years as it returns interest rates to levels now seen as neutral or normal at around 4.75%. This would shift floating rates close to 8%.
Floating rates
Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until at least early 2014, given the Reserve Bank's comments. But there has been a big change in the structure of interest rates in recent months because of the Reserve Bank's new high LVR speed limit. Those borrowing less than 80% of the value of a property can get lower rates than those borrowing more than 80%.
Borrowers can often get cheaper than advertised deals through their brokers because the banks are competing hard for business, particularly for borrowers with more than 20% equity.
Fixed rates
Fixed mortgage rates for sub-80% borrowers have been falling over the last couple of months as banks push hard to lend more in this unrestricted area. The banks' funding costs from overseas borrowing and local term deposits have been falling. However, rates for those borrowing more than 80% have been rising as banks try to discourage this limited type of lending.
Fixed rates depend more on wholesale interest rate moves than the OCR. They also depend on the banks' funding costs on international markets, which have been falling in recent months as financial markets are calmer.
The fixed vs floating decision depends on your outlook for the OCR and your personal situation. A flat to falling OCR makes floating more attractive, while a fast-rising OCR makes fixing more attractive. In my view, the OCR is flat for now. It may rise next year, but not quickly. Bank economists expect the OCR to start rising from March and rise to around 3.5% by the end of 2014. Some then see it rising only as high as 4%, while others see it going as high as 5.5%.
What does all this mean for the property market?
The property market is in an unusual situation because of the Reserve Bank's high LVR speed limit and because of a surge in net inward migration over the last six months. Volumes of house sales have fallen in recent months because first home buyers and investors borrowing more than 80% have been pushed out of the market. But prices for those properties that are selling have continued to rise, in part because of a lack of new listings and strong demand from investors and migrants with plenty of equity.
Some new building has started in Auckland, but remains below expected demand from migrants from overseas and from the rest of New Zealand. Migration has picked up in recent months as more New Zealanders come from home from Australia and fewer leave, which is increasing demand for housing.
The Reserve Bank forecast annual house price inflation of 10% and 3.5% nationwide in 2014 and 2015 respectively. It saw continued upward pressure on prices from a lack of supply in Auckland and Christchurch, and a rise in net migration.
24 Comments
The worm has turned - The early bird gets the worm
or gets screwed over for thousands.
regards
Or another false alarm?
Not this time - start fixing if you havent already as the Banks will be jumping onto this like theres no tomorrow
Not this time as in the last 5 years of yes its this time?
If you say its a rise of 2 years and then a fall back then you want to fix for 4~5 years to avoid it.
4~4 years is typically around 7% v the current floating or 1 year at 5.5%.
So you should be able to spread sheet that and work out what you are going to be paying by fixing V floating over 5 years. Last time I did that staying floating saved me thousands.
and that rise is only if you believe this hocus pocus.
On top of that the LVR fiasco seems to be driving down the rates for the high equity ppl, and I dont think that trend has bottomed yet.
Then Stephen Hulme posted a great piece on where the markets see inflation for 2 years out, 1.4% +/- a bit just where it is now...
So 8% retail makes no sense to me.
You pay's your money and takes your chance.
regards
Which economic or financial fundamental has changed in the last/next 12 months that would make fixing now a good idea? (that hasn't already been predicted and factored in) Fixing for 12 months isn't fixing. fixing is 2+yr min.
If its going to rise consistantly for 2 years, then fixing for 2 years seems silly, ie you come off at and onto the peak rate. So really fixing for 3~5 years might be "sensible" but do the numbers...
regards
I thought it was interesting to note Mr Wheeler, in his video speech, mentioned that 70% of mortgages were floating or fixed for 1 year or less - did anybody else hear that ?
That would mean any rise, would not take long to for market realization – talk about ripping the cash drugs away from the dependent.
That has been said before I believe...
and yes that means raising will have a "quick effect"
regards
"it will increase it to 4.75% by early 2016. That would lift variable mortgage rates to 8% by then."
We (our economy) wont survive a rise to 8%, in its and teh world's current state IMHO, it would trigger a recession.
regards
If interest rates do a nasty upturn then fixing ain't going to help you.
If you borrowed heavily, and already are highly committed to paying the interest, you also don't have much capacity to reduce the debt. It means you are in a thirty year bad situation and the solution of fixing offers you just a year or three.
Some even advise fixing for a year. Whistling in the tornado IMHO.
(note: This is not a prediction as to where the rates will go)
What do you term as "a nasty upturn" - its all relative. Remember the days of 20+% rates, some fell, others stumbled, but the majority solidered on and came out the other end better off. All of the indicators are there - rates will go up, I fixed 3 months ago for 4 years at 6.20%. I know that at the end of this term I will be looking at 7.5+%, but hey by then I will be at the end of my mortgage term and will be one of the fortunate few paying back less than $100 per week. Alls good but I do feel for those with 00's of thousands left on their mortgage as again some will stumble and fall, never to get back up.
So really you are posting to justify your position, and encouraging others to do a lemming.
Sure, post some reasoning on why after 4~5 years of stagnation we'll see such a significant rise now (or soon) and see it sustained.
On the other hand, just look around the world at countries who's RB did try to raise and how far it got them and their economy.
regards
Stehen - look around you, smell the roses and have an epiphany with mother nature. All the economic indicators are there. If you so chose to ignore them, good on you - I have done what suits me and over the last 20 years (including my latest 4 year term) I have averaged under 6.4% including at times floating my mortgage..
What "good" ie inflationary indictaors?
NZ, Inflation at 1.4%, Stephen Hulmes calc showing 1.4666% (or so ) 2 years from now.
Oil so expensive its stimying economic expansion world wide.
Oil crude production at its max per day and dropping in our not far off future.
Huge un-addressed debt overhang world wide.
Signifcant youth un-employment, worldwide.
"expansion through austerity" rubbish.
EU looking at a recession.
Japan cant get out of recession/deflation.
Property bubbles everywhere.
Gold down 1.3rd?
Sure do as it suits you, but if you want to suggest others do the same, surely provide some logic and reasoning on why they should commit to spend a lot more on the mortgage?
regards
Its all smoke and mirrors, for every negative theres a positive. Human nature is such... there always has and always will be the optimist and the pessimist, but it really does come down to what rocks your boat - Stephen?
Really? so what smoke and mirrors are you believing?
You seem to be gambling that by fixing now you wont pay so much over 5 years as not fixing and taking the increases on the chin.
Doesnt matter what rocks my boat, what matters is the price/cost and making a sound decision.
You have chosen to pay more up front in order to maybe save some $s. Can you even quantify what that saving will be? (fixed v staying floating) If you cant how can you justify your decision?
I did a small spreadsheet, I think with my small mortgage over 5 years Ive saved $4~7k by not fixing 4 years ago. If I recall correctly we'd have to be at 7~7.5% mortage rate in year 4 (today) to break even and start to lose in year 5. Yet here we are still around 5%.
A few hours work to make a sound decision and for $4~7k sounded like a good deal, say $1k~$3k per hour return. Of course you are now commited.
regards
iNDEED - It comes dwn to ones own personal circumstances and what "deal" best suits them. If your spread sheet said "well done" well done. I suppose we will wait and see, to see what eventuates. Good luck outa here,
Seems to me we are on the same page Boofta. We both have relatively small debt. Sometimes I too have indulged in fixing. Won some and lost some - but it has served it's purpose.
My concern is those who are on a very marginal cashflow between income and mortgage costs. Fixing is only going to give them some short term safety in what is a long term situation they can't readily step out of.
Not sure what you mean by long term as we have cycles.
So the RB expects a peak point in the cycle in 2016 at 4.75% then I assume a drop off back down?
Really then the cash strapped only have to work on 8% in 2016 as a worst case.
So for instance I just did a very quick and dirty model for 5 years mortage repayments for me.
So if it stays at 5.65% floating I pay $22.3k over 5 years.
If I fix at 7% I pay 25.4k
If the variable rate gets to 8% in Jan 16 and drops back again to 6% over the next 3 years I end up paying 24.8k.
So unless we see the 5y dropping or a much higher OCR expectation (ie inflation) I cant see why fixing is so worthwhile, unless yes, you are maxed out at 5.65% and then, well thats simply stupid you have no margin of safety.
regards
Indeed - regardless whether or not you have a large or small mortgage, you still need to do the sums. Its not hard, you dont have to be a rocket scientist, it just takes a bit of time. Unfortunately the biggest problem with consumers is complacency - she'll be right mate, I'm managing, I will just continue paying what I am as Im coping. I would hate to think how much the Banks make of the gulible and knieve with their - "its too hard" attitude. Heaps!
"Bank of New Zealand chief economist Tony Alexander said that nobody had correctly forecast interest rates in the past five years, and there was no reason to think that would change in the future."
Wrong Tony.....
Plus of course self-admission, YOU have failed.
regards
Bankers you cant trust them - you just have to be astute enough to understand what is happening around you, and when its time to move, dont dilly dalley around just move!
I dont and hence I sat still, quite a few $s better off from my own decision.
regards
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