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Brother in law’s guide: Why fudging the fixed vs floating decision makes sense (Update: January 13)
January 13th, 2009
By Bernard Hickey
Here’s the short version: Fixed mortgage rates are rising, but it’s possible variable mortgage rates could stay below fixed rates until later this year. Those choosing to go fully fixed for a 2 or 3 year term are betting the OCR will rise quickly above 5% by the end of 2010 or early 2011 from 2.5% now. That is possible if the economy recovers as strongly as most economists now expect and given it has averaged 6% since 1999. (Updated January 13)
Those choosing to go completely variable are betting the OCR will stay below 5% until at least late 2010, which is possible if the global economy remains stagnant and New Zealand’s economy recovers fitfully. I’d say to my ‘brother in law’ the safest bet right now is to split the mortgage into half variable and half 2 year fixed to allow early repayment and to reduce the risks of either a sudden move up in the OCR or no move at all.
Here’s the long version below
I’m going to regularly review the various mortgage rates on offer and examine the types of decisions any homeowner has to make.
Every homeowner is different with different income situations and different needs for certainty. Some may want to take a punt on interest rates, while others are simply looking for the cheapest deal right now, or both. So I’ll look at one ‘type’ of home owner and any reader can make up their own mind whether this applies to them.
I’m going to call this type my ‘brother in law’. This home owner is living in the home, has a couple of young kids, one and a half incomes, and a desire to keep interest costs as low and as predictable as possible, while at the same time retaining some flexibility for debt repayment from bonuses, payouts and inheritances.
Where will interest rates go?
The first decision any home owner has to make before deciding what type of mortgage, what bank and what rate they want is what they think will happen to interest rates. Fixed mortgage rates are determined by what happens in wholesale interest rate markets, what happens in retail deposit rate markets and how much profit banks want to make. That’s plenty of variables right there, but unfortunately for punters there’s plenty more variance underneath that.
For example, wholesale interest rates are effectively the market’s judgement on where the Official Cash Rate (OCR) will be at a certain period in the future. The OCR, in turn, is decided by the Reserve Bank of New Zealand Governor Alan Bollard. His role is to keep the inflation outlook between 1 and 3% over the medium term. So traders and economists in these wholesale markets try to second guess Bollard on what he’s thinking now about the growth and inflation outlook and what might happen in the future.
The global economic outlook also has to be thrown into the mix because that can affect the New Zealand economy and sometimes cheap foreign money can flow into our wholesale money markets and push rates down. Another variable is New Zealand’s sovereign credit rating. If it was downgraded our wholesale interest rates would rise.
The longer the fixed mortgage term, the more variables come into play. For example, the Reserve Bank announced in June 2009 that banks would have to raise more of their funds locally and more of it at longer terms. This effectively pushed up the funding costs for banks and they have passed that on in the form of higher fixed mortgage rates. No one can be particularly sure either what the banks will want to do with their profit margins. They have been falling for the last couple of years. That may not last.
Fixed interest rates are rising, but floating rates may be hold for another 3 months
The OCR has been unchanged at a record low of 2.5% since April 30, 2009 and the Reserve Bank has pledged four times since then to keep the OCR at or below 2.5% until the middle of 2010. If the RBNZ sticks to its promise, that means the OCR, and therefore variable mortgage rates, are unlikely to rise until June 10, although markets reckon a March 11 hike is possible. The next Reserve Bank statement on the OCR is on January 28.
However, fixed mortgage rates rose sharply in the last 8 months of 2009, particularly longer term fixed rates. In the past many homeowners and banks opted for 2 year fixed rates. The average bank 2 year rate has risen from around 5.9% in mid February 2009 to around 7.2 % now, while 5 year fixed rates have risen from around 6.5% in mid-February to around 8.7% now.
Fixed mortgage rates have averaged around 8% over the long run in New Zealand, so anything below 8% would appear cheap, unless you believe New Zealand and the world is likely to face permanently lower interest rates for years to come.
We are now in an historically unusual position where floating and very short term mortgage rates are cheaper than longer term mortgage rates. In the past the ‘easy’ decision was to opt for a longer term rate. Now that decision is not so easy. Those people who want the ‘certainty’ of a fixed rate for a longer period will have to pay more for that certainty and will have to take a conscious decision to pay more in the expectation that variable rates will be higher than their fixed rate for a good chunk of the fixed period.
Currently the lowest mortgage rates are variable and around 5.8%, while the best 2 year fixed rates are around 7.2%. This means that anyone taking out a 2 year fixed rate is assuming that the variable rate will be higher for at least the last year of the two year term. That would imply an OCR of around 5% late in 2011. That is possible, but would imply quite fast increases in the OCR in late 2010 and early 2011. However, it shouldn’t be forgotten that the OCR has averaged 6% since its introduction in 1999.
Anyone making the decision about a 2 or 3 year mortgage right now is taking a decision that the OCR will rise quickly from mid 2010 and keep rising through 2011. Anyone deciding to stick solely with a variable rate is assuming the OCR will stay at or below 5% for the next two to three years. That is also possible, but less likely in my view.
I believe there is too much stimulus in both the global and local economies, which will force central banks to quickly tighten money policy from early to mid 2010, particularly in New Zealand where the housing market is bubbling again because of cheap interest rates. The risk to that view is if the global economy fails to recover quickly and stagnates.
There is another way
One way for my fictional ‘brother in law’ to have his cake and eat it is to split the mortgage.
My brother in law wants to repay his mortgage as fast as possible and understands that repayments now save much more over time than waiting until the end of a fixed term to repay, even if the interest rate is a bit cheaper. There is the possibility of bonuses or redundancy payouts or inheritances that he wants to use to pay off the mortgage quickly.
One option is to split the mortgage into a fixed portion and a floating portion. This reduces the risks of being caught horribly by either interest rates rising sharply over 5% or not moving at all. It also allows early repayment.
The rates now (Updated January 13)
BNZ has the lowest variable rate at 5.59% for its Total Money loan, while ANZ has a 5.69% simple variable rate (only for 80% or lower loans), ASB has a 5.75% regular variable rate, Kiwibank has a 5.79% standard rate and National has a 5.75% regular variable rate. Westpac has a 5.69% Choices Everyday variable rate and a 6.29% standard variable rate.
At the moment I would suggest my brother in law keeps half floating and half fixed for around 18 months to 2 years. That’s about as long as you can reliably think about the future of interest rates and the 18 month rates are looking reasonably good value at the moment. Kiwibank has the lowest 18 month rate at 6.39%, while National is at 6.60%, Westpac is at 6.59% and BNZ is at 6.59%. ANZ is at 6.69% and ASB is at 6.75%.
The absolute cheapest combination (although I suspect my brother in law would want to keep both mortgages with the same bank for ease of service) is for a BNZ Total Money variable mortgage with a Kiwibank 18 month rate. Kiwibank and BNZ have the most competitive combinations.
Tags: Brother in Law's guide
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November 9th, 2009 at 6:47 pm
A timely piece BH. Alot of my friends are coming off fixed term and unsure what to do.
Another option is to fix for 2 to 3 years and take a mortgage with ASB Bank (your sponsor). ASB allows you to knock of $10K lumps of your P & I mortgage.
Martin Hawes recommends you always take a fixed interest mortgage rate
Three and four year rates are still around 8%-8.5% and this is the long term average for NZ.
I see alot of people floating or half floating and then seeing inflation going through the roof + the economy bouncing back into life and Mr Bollard “turning the ship on a dime” by ramping up interest rates to control it all
November 9th, 2009 at 9:10 pm
5 years fixed at 5.99% was a good move back in Feb/March
November 9th, 2009 at 10:18 pm
Good advice Bernard.
My take on what is going on in the local economy is that all is not rosy – this being the case, any significant change in the OCR will upset what is already quite fragile.
I suspect the OCR will rise toward the end of next year, but tentatively and may coincide with some small tax cuts.
The Reserve Bank insisting the banks raise more of their funds locally and more of it at longer terms was a good move and certainly helped alleviate the pressure on an already over stimulated property market.
More mortgages on floating or short term fixed rates will enable the reserve bank to have a more immediate affect on the economy without significant changes to the OCR which is probably a good thing.
November 10th, 2009 at 7:17 am
@28_year_old: “I see alot of people floating or half floating and then seeing inflation going through the roof + the economy bouncing back into life and Mr Bollard “turning the ship on a dime” by ramping up interest rates to control it all”
IF the economy bounces back, yes indeed…however NZ isnt alone in this, this time its a massive global event and probably the worst since the 1930s.
First look at history, if you look at the 1930s it took a decade and massive Govn spending near the end (and no public consumerism) of WW2 to lift out…They also had cheap and abundant local oil and raw materials….we (as in globally) dont have that anymore. Fast forward to Japan in the 1990s and their lost decade (that is approaching 2 decades), yet the thing to notice is they were alone in their problems they could export to the rest of the world, to recover. Yet they didnt and this is a global event so the globe has no where to export to.
Look at today, we see the USA and EU following Japan’s banking a Mpolicy ie not fix the issues…zombie banks and over-inflated companies….with too much capacity and oil running at 4% of GDP…ie $80 a barrel…
So, you are putting forward one possible scenario, yes I can consider it viable, but out of three possibilities, ie stagflation, or a second great depression I would consider it the least likely of the three. So for me its likely that we will languish at low OCR for several years….I think inflation wont happen within 2 probably 5…..ie the OCR rises to say 8% is for me is an unlikely event…so Im floating and using the difference to pay down the mortgage…so 1) I have less interest, and 2) Im used to paying the 12~14% it might get to without financial worry….Im baking that cost into my budgeting…
What you can do is run a spreadsheet and guess at rates over 5 years and compare that with a fixed of 5 years….when I did so we would have to see an OCR or 10% within 3 for me to lose money over 5….ie its too late 5.99% for 5 years was a good deal, 8+% today I think is a poor choice, but thats after all your call.
regards
November 10th, 2009 at 7:29 am
On the split option I would not go 60/50
I would be estimating the max any inheritance or bonus would be, and add a little bit more for the floating.
So say a mortgage of 200k expect max bonus to be 20K make the floating 50K
If have a say 50 or 80% equity in the home (which any sensible Bro in law would have)…again do the same reduce the equity and add more to the floating so one in effect has an OD of 20 or 30K ..for emergencies or able to take advantage of opportunities that may come up
November 10th, 2009 at 7:33 am
Put all your loan on floating for now and as soon as you see floating rate starting to rise, then switch to fixed in lots for 2 or 3 years, say 20% for each rise, keeping a base 20% always on floating to have flexibility of repayment.
November 10th, 2009 at 9:15 am
@EMkay I’d (in fact I am) sitting and wathcing what Bollard says.
November 10th, 2009 at 10:10 am
Nice steven, hope your putting all your surplus of income into it, every extra dollar will save you a small fortune!
November 10th, 2009 at 10:19 am
As a rough approximation (especially early in the mortgage), you can take the arithmetic average of the rates over the duration to compare. So for example, a 2 year @7% rate is equivalent to a 1 year @ 6% plus the second year @8%. I think there’s a better than even chance 1 year rates will still be less than 8% at the end of next year, so I’d probably opt for the 12 month rate now.
Do the maths for the longer durations – you’d have to be expecting short rates to increase quite a lot at the end of next year to be fixing long-term.
November 10th, 2009 at 10:22 am
Bernards options are:
1)fix at 8% if you think the economy will recover next year and rates will go up.
2)float at 5.7% if you think the economy won’t recover and rates will stay low
3)or split 50/50 if you have absolutly no idea what is going to happen.
I beleive all the indicators are pointing to a economic recovery with higher inflation and interest rates, Commodity prices are going up all over the place diary food prices are increasing, so is timber, oil etc.. Central banks everywhere are continuing to pump billions of new money into the financial system. The odds are heavily stacked towards inflation and double digit interest rates but the safest option would be to float and payoff as much principle as possible to avoid getting into financial strife whatever the senario.
November 10th, 2009 at 10:24 am
@Barry P: Yes…paying down debt first seems to be the classical way to “save”…the only thing Im considering is 2% of Kiwisaver to get the $1000 matched by the Govn…but even then most Kiwisaver accounts seem to have been losing(?)…and if we go second dip I assume they will lose more….so Im hanging off for a bit…before I lock myself in for a year. I think the other thing is to stay liquid because things can change so fast as weve seen over the last year. So if I lose my job and have to move to another town or even country! and I have a fixed mortgage then Im into hefty penalties…if its floating no penalties…
regards
November 10th, 2009 at 10:58 am
Good points steven
I’m no economist but with all the quantative easeing/money printing surely inflation will rise and the OCR is written policy to keep inflation between 1-3%.
Also Fonterra increased payouts by $1 a kilo yesterday, that will inject $1 billion into the economy
Personally my rentals are fixed 6.5% for next 5 years
Regards
November 10th, 2009 at 1:16 pm
Bernard, I think it’s clear that Bollard won’t be putting rates up in a hurry. Anyone who’s considering fixing right now is stark raving bonkers. It made sense a few months ago, but not now.
November 10th, 2009 at 5:02 pm
@Kieren – option 1 fixing @ 8% (3 years) is worse than doing a 1 year fix at 6% followed by a 2 year @9%. And worse than 1 year @ 6%, then 1 year @ 8%, then 1 year @ 10%. Interest rates have to move quite a lot before we get beyond even that scenario…
The difference between float and 1 year fix is minimal so I think that is probably worthwhile.
November 10th, 2009 at 6:50 pm
Bernard, I think we may be the brother in law! You explained our situation exactly. It is great you have explained the mortgage interest in an easy to understand article. We are not all economists and financial wizards and sometimes the technical jargon of money is lost on me.
Thanks to the other people who contribute their views too to other topics on this web, it has been a real eye opener for me and it has helped explained a few of the missing pieces of information.
Thanks again.
November 10th, 2009 at 6:53 pm
you used to be able to split the mortgage up to part floating, part 1 year part 2….etc
Is that still possible? At least you would get an average.
Glad I paid my house off in the 1980’s
Back to Trademe to buy some more shiny precious metals:)
November 10th, 2009 at 10:12 pm
> I’m no economist but with all the quantative easeing/money printing surely inflation will > rise and the OCR is written policy to keep inflation between 1-3%.
I don’t believe the Aussie banks – who pretty much own us – have actually engaged in quan-ti-ta-tive easing over the recession so I don’t see that as a reason for inflation rising in the Australasian context.
> Personally my rentals are fixed 6.5% for next 5 years
I don’t think you’ll lose to much on that deal over the next 5 years but I think you would do better if you had most of yours floating b/c I tend to agree with Steven that there is no great economic growth period coming b/c this is global and no one is going to be able to trade out of it. We are seeing the loss of cheap energy occurring at the same time that the American economy is imploding on mountains of bad debt / credit. The situation we find ourselves in today is the new norm moving forward – it will be very volitile but there is no way that there will be any lasting and high growth like we have seen in the last 10 years.
November 20th, 2009 at 11:52 pm
Why is it that all this whether to fix or not fix is based on forecasts? What is the real data such as historical trends and maybe more importantly what the maths is in regard to floating and fixed. If you can get 5.59% on TM from BNZ then how much would the floating rate have to increase for you to be better off by having fixed all or part for 2 years or what have you? The BNZ also allow lump sum payments of 5% to be paid off at any time with no penalty just to add to discussion above. I think it is quite obvious that people should be on floating, there is no other real option. The savings you will get in the short term will off set any risk in the medium term. No fixed rate, even 2 years, seems to be prudent unless you think that a 10% floating rate is likely inside 18months. Even then it may be that long term forecasts at that time show decreasing inflation and OCR and so long term rates drop significantly like what has happened in the past year or two.
January 12th, 2010 at 2:00 pm
I thought brother in law was supposed to get a weekly update. Can one come soon, as I have a mortgage to review.
January 13th, 2010 at 9:18 am
Ricardo,
My apologies. I have updated the story now.
cheers
Bernard
January 13th, 2010 at 9:50 am
Those that were floating back in March, and didn’t fix, clearly missed the boat. What is a tough call now, was a very easy decision back then – but it won’t be the last time that greed has seen borrowers stick to the lower floating rate as in March, or a longer-term fixed one as many did back in 2007 and early 2008 when those rates were the lowest available.
And it is indeed a very tough call now that no one can give you a confident answer to. There are very strong arguments for deflation (lower rates for longer), elevated inflation (much higher rates), and something modestly in between. However, as well as tending to favour the inflation scenario further out in 2011/2012 (possibly late 2010 but I doubt it), I just can not see rates remaining low at a time in world history were individuals and Govts are borrowing massive amounts to prop up their standard of living or economies. The depositor is King, and he will keep demanding higher rates even if the inflation bogey does not raise its head.
So for those still floating, should you sit and wait until it becomes more obvious which ways things will head ? There is much danger in this approach as markets will move far faster than you and I when the issue is resolved and trend becomes obvious. Its all very much as case of working out how much risk you can afford, and acting appropriately – and if things are tough, and the floating rate is all you feel you can afford, then you are the one who most needs to fix more than any of us.
January 13th, 2010 at 10:24 am
People I know just bought a $700K house and put it all on floating!God help them if floating rates rise quick
January 13th, 2010 at 11:12 am
Do you know how big their deposit was, 28yo? (Happy Birthday by the way)
January 13th, 2010 at 11:54 am
Hi Alex
Im getting old! 80K deposit, don’t know the bank
January 13th, 2010 at 12:24 pm
28yo, what’s their combined income?
January 13th, 2010 at 12:47 pm
Shaun
Im guessing 150K
January 13th, 2010 at 1:49 pm
OUCH!
January 13th, 2010 at 1:57 pm
Ouch why? Sounds like pretty standard maths in Auckland at the moment for younger professionals. Unless they’re gay or don’t want children, difficult questions will eventually arise on how to pay a mortgage on one income…
January 13th, 2010 at 2:36 pm
“The absolute cheapest combination (although I suspect my brother in law would want to keep both mortgages with the same bank for ease of service) is for a BNZ Total Money variable mortgage with a Kiwibank 18 month rate. Kiwibank and BNZ have the most competitive combinations”
You’d need 2 properties, one to secure each mortgage for this combination as the banks require a 1st registered mortgage to secure the debt – they won’t come in as a 2nd behind another bank even if there’s tonnes of equity.
If there was 2 or more properties involved a good strategy would be to spread borrowings between several lenders to foster competition and give yourself more options. Typically the more borrowing & properties you have with one bank/lender the less they’ll do for you and the harder it is to go anywhere else.
January 13th, 2010 at 2:38 pm
Well, what’s the repayment at say 5.7% floating rate, and how does that relate against a combined salary of 150k? And every 0.25% added onto the OCR from this point is adding what, 4%+ onto the repayments? If that’s 150k after tax, all well and fine, but if that’s gross income….
By the way, I’m not criticising. Just seems some scary numbers to me.
January 13th, 2010 at 2:45 pm
It is scary numbers, but the banks will happily lend 4x income in that situation (although they shouldn’t). Probably more, assuming no kids.
Assuming 25% average tax and no student loans (basically ideal outcome), its $120k post tax, or $10k/month. Mortgage payment is $3618/month. At 8% its $4750/month (both 30 years).
January 13th, 2010 at 2:54 pm
At average 25% tax, shouldn’t that be $112.5k nett? Or $9,375 per month? Which still fits well with 2 incomes against those repayments, but lose one income suddenly and you’d be treading water at best.
This is all of couse speculation without knowing the real detail.
January 13th, 2010 at 3:35 pm
Ooops. Terrible maths in my head. Right you are. 25% is basically optimum income splitting (its actually more like 26.5%) and no student loan repayments. It would be easy for average tax rate to be closer to 30% and for the (higher, presumably) single income to have a higher average tax rate again.
You can trust the other two numbers.
January 13th, 2010 at 3:55 pm
The really sad thing is that 700k buys you a do-up in (relatively) central Auckland (say, Sandringham) that even the real estate agents describe as a ‘first home’.
In fact, scratch that. In our experience, they are closer to 750-800.
January 13th, 2010 at 4:02 pm
so how do these guy,s– if they aren,t trade minded– afford to reno these joints or do they whack in a new kitchen + paint + onto the next one ?
January 13th, 2010 at 4:08 pm
I believe floating is the way to go. Price of commodities and assets seem to be on the rise everywhere, fuelled by increased speculative demand and cheap credit stemming from central banks pumping out money as loans and quantitave easing.
So inflation, both in terms of increased money supply and price increase, is very much real.
But most people aren’t seeing any of this money, only the price increases and ever increasing levels of debt to be able to afford a house. Wages don’t seem to have increased much, rather the other way around, if ever slightly.
The result of this is central banks can’t raise OCR much without sending A LOT of people bankrupt and the economy crashing down even harder. People are living on the margin with interest rates at never seen before low levels. Therefore I see a period of high price inflation and low interest rates ahead. One of the few ways to make money will be to further fleece the future generations of wealth by trading houses with each other at ever increasing prices.
Not a rosy picture, but unfortunately it looks very much real.
January 13th, 2010 at 4:29 pm
I’m on a flooding mortgage.
January 13th, 2010 at 4:45 pm
Here comes the inflation wave
http://www.sharechat.co.nz/article/df8e04a2/dairy-aluminium-and-timber-lead-surging-commodity-prices-in-2009.html
January 13th, 2010 at 5:45 pm
Too late for most people but I would also consider fixing and making extra repayments on your mortgage (some banks allow $10K per year) to reduce the principle…
January 13th, 2010 at 5:50 pm
Michael – I can’t think of a single example of that being the way it plays out if you’re right on inflation…in the 70’s & the 80’s etc interest rates eventually had to rise substantially to kill inflation, and that killed many of the floating rate borrowers who thought it couldn’t happen – that is the trade off that the central banks know they eventually have to make .
I don’t intend to want to be one of the lambs sitting there waiting for that to happen
In ever MAJOR economic crisis, and we’re still in one globally , central bankers & Govts always follow the same path; slash interest rates, borrow, bail-out, print money if it gets bad enough, and increase taxes to try to pay for it … it never works as it increases speculation and inflation, and eventually in the end the solution always ends up the same, much higher interest rates and tax cuts to rebalance
Think about it
January 13th, 2010 at 6:36 pm
Jack, you’re right about that the interest rate needs to be raised, and that’s it’s been done so in the past. But in this day where the majority of voters (in NZ) being property owners and mortgage holders, major OCR hikes isn’t going to be very popular. And today it’s ALL about being re-elected and staying in power, not doing what’s good for the country and the economy. Also, politicians probably think that a little inflation is just good to get rid of some debt, thinking they can keep it under control.
The only way i see OCR hikes coming is along with MAJOR tax breaks for mortage holders, to keep the voters happy.
I know the central banks are supposed to be independent from their respective government, but in reality i don’t think this is the case.
January 13th, 2010 at 6:51 pm
some historical,s here back to 1964–from 64 tilll dec 2009 rate,s have been over 9% for 26 of the 45 years —it stayed high for 19 straight years-74 til 93
i borrowed @ 14% in 88—it couldn,t be done now.
floating rate,s-
http://www.rbnz.govt.nz/statistics/exandint/b3/hb3.xls
fixed only go back to 91—-98
http://www.rbnz.govt.nz/statistics/exandint/b2/3089106.xls
98—2009http://www.rbnz.govt.nz/statistics/monfin/rbssr/rbssrpartE/hrb_ssr_part_e.xls
January 13th, 2010 at 6:54 pm
I fixed at 6.50% for 5 years, but those who now are not sure what to do you should look at history.When any country in the past has printed money to cover their debts severe inflation has followed.New Zealand has a huge debt and we are exposed to what ever happens in the US,Europe and Japan.Don’t fool yourself and think if or I should say when they lose control of the situation you can run down to the bank and fix at 8% because then it will be to late.The million dollar question everyone is asking is when and your guess is as good as mine.I think those at the top are operating on a mentality to keep things as good as possible for as long as possible after all you can’t borrow and print money forever.
January 13th, 2010 at 7:21 pm
Michael – there certainly is doubt about the degree of independence the likes of the Federal Reserve has, and although I suspect Bollard is one of the more politically savvy governors in recent time, I have little doubt that the RBNZ has a great degree of independence and he will do what is right for the economy when that situation demands it ….it has not stopped the RBNZ from substantially increasing interest rates in the past, and it will not this time either..and frankly, even if he did have a say in it, of all PMs, Key fully understands that run away inflation will eventually get him voted out anyway.
Inflation is great for holders of hard assets such as property owners, but only if your interest rates are fixed.
January 13th, 2010 at 7:52 pm
The Chairman of the US Federal Reserve Ben Ben Bernanke just fixed his mortgage for 5% for 30 years!! If it’s good enough for him to fix….
http://www.nzherald.co.nz/inside-money/news/article.cfm?c_id=1502776&objectid=10618682
January 13th, 2010 at 8:19 pm
bernie,s 57? don,t the banks have a cut off point at which your age deems you inelegible to borrow?
January 13th, 2010 at 9:19 pm
28_yr_old
Who is offering 5% for thirty years in the local market?
Reckon they’d clean up.
Think of the stability such a thing would bring.
January 14th, 2010 at 10:01 am
Michael – Interest rates will rise regardless of what the RBNZ does. Interest rates have been trickling up and the RBNZ has not been raising rates at all. Once inflation hits we are on our way. It may be later this year or next year but it will arrive. The price of housing is directly related to the availability and price of credit and when the price of credit goes up then then housing will come down. Hold onto your hat.
January 14th, 2010 at 10:35 am
28YO…if you can find a bank prepared to offer you a 30yr at 5%…I think it might be easier to pick gold coins off the rocks at the beach. Rising rates are now a weekly event as the ball is belted between the banks and wannabee banks. Should be some fun when Bollard finds it impossible to carry on with the cheaper for longer BS. Then the rising cost of credit overseas will see a flight of capital as savers go after higher returns. Bingo the banks here must raise their dep rates to keep the savers happy. Up go mortgage rates again. Then the smell of inflation will drift into the market. Soon as it reaches the Terrace and the RBNZ…bang goes the low ocr number. It’s just a matter of time now. Here come de property collapse and what will that do for Bill’s 6 part strategy?
January 14th, 2010 at 10:41 am
Well said Wally – a very nice summary indeed.
January 14th, 2010 at 10:57 am
Wonder if Bollard is fixed or floating?
January 14th, 2010 at 11:06 am
Wally, don’t you ever get tired of talking market down? I understand you sold your property on the peak and want housing market to crash so to do same once again, but you really start to sound pathetic.
January 14th, 2010 at 11:22 am
alen..don’t you ever get tired of lashing out at those you don’t agree with. Tell us why rates will not rise. Tell us there is no property bubble. Tell us families on low incomes can afford housing without WINZ support or govt loan guarantees. Tell us the economy is not a sick dog.. a consequence of decades of grossly poor govt decision making. Best of all alen..explain why it is better to lie to the public about the state of the economy.
January 14th, 2010 at 11:44 am
Wally,
Keep the faith. Especially when you are right!! You have to laugh when an economy has to resort to taking on more debt to fix a problem cased by too much debt. Our leaders gave the drunk a snort of cocaine to stimulate it to continue drinking after an all night binge. I would not rule out future stimulus – but they all come with diminishing returns. More and more cocaine required for less and less effect … and in the the process we all know it is delaying the inevitable and making the crash worse when it occurs. Perhaps we have now lost the opportunity to get the patient to rehab?? Now it may be too late.
January 14th, 2010 at 12:11 pm
Keep going Wally, Jimmy.
@28_yr_old – Does Mr Bollard have access to personal funds outside of our ’system’?
Do we?
Quick squizz didn’t turn up any ‘RaboHome’ products (But I’m not to be relied on).
January 14th, 2010 at 12:38 pm
Wally houses prices are always going to go up and that’s a fact, boom!
January 14th, 2010 at 1:13 pm
“…don’t you ever get tired of lashing out at those you don’t agree with…”
Wally, are you talking to yourself?
January 14th, 2010 at 1:20 pm
You said numerous time over last 12 months, dropping interest rates will not result in higher house prices due to double digit unemployment, uncertainty, recession blah,blah…now suddenly house prices have everything to do with interest rates, and other factors (economic recovery, record net immigration…) are irrelevant. What a spin!
So, no metter what happens in this world, your conclusion is same: house prices will collaps.
January 14th, 2010 at 1:32 pm
alen,
“So, no metter what happens in this world, your conclusion is same: house prices will collaps.”
I cant speak for Wally. All i can say for certain is that prices will correct back to long term values (3-4 * SINGLE incomes) some time in the future. It could be decades of low growth, 10 years of stagnation, a decade of LOW growth HIGH inflation, low inflation and 5 years of 5% drops, 2 years of 15% drops, 10% rise followed by even larger drops etc etc etc. All you can say with certainty is that the further houses get out of line with incomes, the worse the consequence. When, who knows? Its like driving drunk at greater and greater speeds. Would you draw confidence from the fact that there has been no accident yet?? You know its either crash, or get the drunk to slow down.
January 14th, 2010 at 1:37 pm
Jimmy, I’d love to see house prices at 4x single income, but as a result of increased income, not droping house prices…
January 14th, 2010 at 1:39 pm
Get it right alen…I said lower rates would simply serve to suck more fools into taking out huge bank loans to pay the bloated prices…I guess you were one of them. I have always said rates are connected to the property market. Happy? My conclusion has not changed…the NZ property market is a price bloated ponzi scheme propped up by Bollard’s cheap rates and govt pork. Sooner or later it must implode. You can think what you like. Check back to the early months last year and look at what the idiot Cabinet did with the first home loan scheme. If that wasn’t pork…what is? As for rates..it’s time you understood credit is a world commodity. Supply will not cover demand. QE will continue in one form or other and sooner or later the inflation must arrive. The Kiwi is set to drop and all imports cost more. Those higher costs flow into the economy and you will know about it before the stats come out if you bother to count the strikes for higher pay.
January 14th, 2010 at 1:50 pm
Alen
About the only way that could happen is through high inflation but stagnant house prices (ie fall in real house price). Hoping for anything else is fairly unrealistic.
January 14th, 2010 at 2:01 pm
How many have taken their eyes off the billions being borrowed by English as he tries to balance the budget without cutting out the spending splurge undertaken by Cullen. Those billions are not all going into revenue producing investments. So think about who might have to front up with the dosh to pay the annual cost of the credit and somewhere out there in the future pay back the billions!!. At a time when the cost of credit is set to rise. QED taxes must rise and or benefits be cut along with govt waste.
The only possible…remote…bloody unlikely event that would save that nightmare from arriving…would be drilling into a shite load of oil in shallow water near a port.
January 14th, 2010 at 4:34 pm
Wally – fully support your comments in this thread. Unfortunately, many people have either very short memories, are too young to have one, or don’t study history. They will always blindly argue with you, because of one of those factors, until finally it happens and they start their learning process….I find being patient is the only way to deal with them & keeping fingers crossed that they have not commited too much money to where their mouth is.
January 14th, 2010 at 4:37 pm
Jack, when you say money, do you mean debt/future earnings?
January 14th, 2010 at 4:53 pm
Hamish – exactly. Debate is good, as is taking calculated risks for those well placed to take them, but blindly making assumptions without regard for all the risks is always the worry with some people
January 14th, 2010 at 5:20 pm
Here is something to blow your mind…
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100002951/a-global-fiasco-is-brewing-in-japan/?utm_source=tmg&utm_medium=TD_japan&utm_campaign=finance1401am
January 14th, 2010 at 6:53 pm
I’ve never really understood this OCR/inflation thing.
So prices rise because people are prepared to pay more, so the OCR is raised to so banks will deposit their free cash at the reserve bank instead of lending it to the schmuck who wants to borrow the money, unless they want to pay more. The banks are being bribed to stop lending money to customers . . . . Seems like a good idea!
But everyone pays, those who are buying now and those who bought 10 years ago – fixed or floating, as the increase in rates eventually trickle through the system. What actually happens? There’s 160bn in mortgages out there, so a one percent increase is 1.6bn increase in income to the banking system, and 1.6bn taken out of the real economy. Doesn’t seem fair and right. But it’s anti inflationary right? Seems like a direct handout to the banking system to me.
Here’s another angle; Inflation is increasing so interest rates have to be higher (received wisdom right?). Higher interest rates mean the hurdle rate for investments must be higher, therefore only the higher return riskier investments are undertaken, and these will be those that have the greatest inflationary impact. Higher interest rates bake in inflationary expectations. Higher interest rates demand a greater growth rate in the economy, which is inflationary.
And a third view: Inflation is an increase in the amount of money in circulation. The amount of money in circulation increases more when interest rates are higher. If there is too much money in circulation we should increase the interest rate.
So who came up with the idea that increasing the OCR would reduce inflation, how exactly does it work?
Interest rates should be set by the market not the central bank.
January 14th, 2010 at 7:28 pm
Here you go Fred..read it all and all will be revealed.
http://www.rbnz.govt.nz/monpol/statements/0090630.html
January 14th, 2010 at 7:49 pm
Ahhhh this must be the bit;
“The economy is being assisted by both monetary and fiscal policy support. As growth becomes self sustaining, fiscal consolidation would help reduce the work that monetary policy might otherwise need to do.
“If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010. Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action.”
Self sustaining growth . . . that’s it . . . . fiscal consolidation . . . yep.
January 14th, 2010 at 9:22 pm
You’re onto it Fred, the OCR is a crock that should be consigned to the dustbin. The correct way to control inflation is by addressing money supply even if it means our foreign-owned trading banks may have to choke on their spreadsheets.
“The amount of money in circulation increases more when interest rates are higher.”
ABSOLUTELY:
Received wisdom explains that inflationary pressures must be reined in by increasing the OCR and thereby reducing demand across the various sectors of economic activity. However, this process has exhibited perverse effects in New Zealand. In particular, increases in the OCR, and so the 90-day rate, have increased the rate of money (and credit) supply (refer Figure 4). Such an easing of monetary conditions is totally contradictory to that necessary to control inflation.
From page 7 of:
http://www.berl.co.nz/1050a1.page
and yes I know correlation doesn’t imply causation bla bla bla
January 14th, 2010 at 9:51 pm
Neil C – (Hi) ” The correct way to control inflation is by addressing money supply..”
How?
Cheers, Les.
January 14th, 2010 at 10:00 pm
Hi Les: How? Maybe reserve ratios. Controlling money supply has never really been tried (wonder why???) so we dont’ know what works.
January 14th, 2010 at 11:06 pm
Hi
Because there is no real way to distinguish between inflation and real and justified changes in demand and supply the answer is to forget it and let the market do it’s job.
Because a Government’s role is to protect private property (and the value of private property), and because fiat $ in your possession is private property then their responsibility is to not to print any more than they can tax, or can generate a return from, to extinguish the $ they printed in the first place. That’s why taxes/all returns to the Govt have to extinguish the $ printed to protect the value of the rest of the $ in private hands. I reckon anyway.
January 14th, 2010 at 11:35 pm
Bernard, you would need bricks in your head to take a 2 year fixed at the moment. With most of the banks around 7.25% for 2 years and just 6.6% for 18 months, you need to be banking on the six month fixed rate being over 9.2% in eighteen months time – the chances of that happening are about the same as pigs flying.
My advice for today is to take 2/3 fixed for 18months at 6.6% or below and 1/3 floating at about 5.7% if you want some security about payments. This will give an effective rate about 6.3% for now rising to about 6.7% towards the end of the fixed term. Then just fix for six months or 1 year (if those are lower than floating) until the long term rates bottom out again in the next cycle. Odds are you’ll probably be better off going fully floating until long term fixed rates bottom out again (maybe several years time) but it’s probably not worth the risk unless you have a strong stomach.
January 15th, 2010 at 7:41 am
Neil C – “Maybe reserve ratios.” Well, so long as we make em’ fractional, not fictional, see:
http://www.debtdeflation.com/blogs/2009/12/23/mish-on-the-fictional-reserve-system/
“1) Lending comes first and what little reserves there are (if any) come later.
2) There really are no excess reserves.
3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely “fictional”.
4) Banks are capital constrained not reserve constrained.
5) Banks aren’t lending because there are few credit worthy borrowers worth the risk.
Fractional Reserve Lending is really Fictional Reserve Lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans.”
However, RBNZ are hopeful with this:
‘The Reserve Bank’s new liquidity policy for banks’
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2009dec72_4hoskinneildrichardson.pdf
From pages 15 and 16, “In addition to strengthening banks’ liquidity positions, the core funding ratio might also be expected to provide a degree of automatic stabilisation to the economy during periods of strong credit expansion. In recent years, banks have been able to fund cheaply in the offshore money markets and use derivatives to synthesise fixed-rate term funding at a cost cheaper than actually borrowing in term markets. 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. ….”
“…. 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.”
This only deals with the ’shape’ of funds, primarily for prudential liquidity purposes. Plus, it does look like it can crimp supply of cheap wholesale money, but I have my doubts when I reflect on a few things, for instance operational practice and cultures that can, “..use derivatives to synthesise…”, (fiction’esise maybe?) and wonder if, again, this method of control is too indirect. (Where there’s a will, there’s most probably a loophole?)
“Controlling money supply has never really been tried (wonder why???) so we dont’ know what works.” I think we do, non-fictional reserve ratios (with effective policing) along with being in more direct control of issuance. Plus, reflecting on Steve Keen’s thinking (deal to ponzi’esque speculation) I wonder if change and variance of risk-weightings in the capital adequacy ratio (CAR) might also be useful?
But if you had control of this, money issuance and supply, would you want to give it up? I know I wouldn’t, banking looks like a business sent from heaven. How much of your business can you “synthesise”?
Cheers, Les.
January 15th, 2010 at 7:57 am
“THE RBA may have to raise interest rates faster and further this year after a surprising surge in the job market. Economists say a rate hike next month is a near certainty after Australia’s jobless rate fell…”(herald sun) …a short clip off the web to point out why all the squirrels in NZ will be opening bank accounts in aus and so, why the splurgers and gamblers who borrowed other peoples money so they could chase property, are set to face rising rates regardless of whether they are floating fixed or sinking. And that’s without the impact of the rising cost of credit as a consequence of all the govt borrowing going on worldwide. You can count Bill English in on that trend. The little fish in the big pond is about to get up close to the feeding frenzy for credit and there aint enough for all the jaws.
January 15th, 2010 at 9:06 am
Wally – Japan? So why is it that a country that is a net exporter get’s itself into trouble. It’s constituents earn plenty of overseas funds, more than they need to get by on the world stage. Isn’t it the danger of the Government running a deficit and the way they funded it. It’s Government “funds’ it’s deficit by buying it’s own fiat currency from the banking system. These are then sold by the banking system to purchase the FX receipts off the constituents, appropriating their hard earned FX. Now all of the chickens are coming home to roost in a crisis where their CB is now forced to consider the purchase of the JGB’s flooding the system.
January 15th, 2010 at 9:55 am
Yesssir I sure won’t be buying no Japanese govt bonds any time soon. Ditto US Tbills and UK gilts. All fodder for Mr Market to chew up.
January 15th, 2010 at 10:03 am
ASB and subsidiaries Bank Direct and Sovereign have hiked one to three year mortgage rates by between 10 and 30 basis points…
http://www.interest.co.nz/ratesblog/index.php/2010/01/15/asb-hikes-1-3-year-mortgage-rates-above-other-banks/
January 15th, 2010 at 12:00 pm
Les, What’s with this desire to “control the money supply”? It should be limited only to the extent that people are prepared to take on debt. Animal spirits right? – go and create value. The issue is the quality of the debt and hence the soundness of the money that is created. Concerns about this should be addressed by limiting loan to valuation ratios and the risk of default. Concerns about asset bubbles can be addressed on the supply side (if they can be) and if prices are still rising it’s because there is a genuine shortage and prices should rise.
An interest rate greater than the underlying growth rate of the economy, and sovereign’s duped into buying and paying for their own fiat currencies are the real culprits here, and the attempt to gain a “free lunch”. Interest rates should be set by the market and therefore set by the real rate of return on the investment that bankers seek to find in a competitive market. To achieve sustainability interest rates should be driven as low as possible, and as a result the drag of the banking system on the real economy will be as low as possible. That’s what our Government should be trying to achieve, rather than having people hang on the gobbledygook associated with each OCR announcement.
January 16th, 2010 at 11:19 am
Another option to consider is to fix 1/3 on very short period ( 3 months @5.5 with ANZ. or 6 months @5.7 with National) instead on float.
January 21st, 2010 at 5:51 pm
pffft,… the correct answer is… sell your house and go buy a campervan…
January 22nd, 2010 at 9:20 am
Who listens to this idiot anyway. He predicted a 30% drop in house price, what a wally. Flipping a coin is just as accurate as any prediction from this idiot
January 22nd, 2010 at 11:54 pm
Don’t be a pussy Bernard,
Fix or vary?
January 25th, 2010 at 3:48 pm
Is it just me or ANZ just droped floating rate?
January 26th, 2010 at 12:28 pm
So, has it been droped, or just typing mistake?
February 1st, 2010 at 11:50 pm
That’s an update? Bernard, can you just read what you have written and tell me if it sound slike this…”I don’t know what is going to happen in the future any more than anyone else so here’s the lowest rates for floating and 18month fixed. Why 18 months? Well, gee why not i say, it’s as good as any and, yeah, pffft!”. I think I could have written that when I was still ats chool in Form 3.
February 10th, 2010 at 1:27 pm
Seems like some long term rates are coming down now.
February 11th, 2010 at 9:29 am
Kia ora Bernard,
Mate you’re saving me thousands of dollars and saving me stress thank you – sincerely! I have recently brought my mortgage off very high fixed rates – and approximate to the “Brother Inlaw” well.
As per the suggestions here we switched the entire mortgage on to the floating Total Money BNZ rate to bowl as much of the debt as possible and once rates move we will split with about 20% Floating, 80% fixed. My question is:
“What do people think of my plan to fix the 80% for only one year so that I can reload a new amout on a floating rate 12mths later – wiht the floating having been paid off?”
I feel that with the high level of volatility and uncertainty in the global and domestic economy the best thing to do, is to reduce debt as fast as possible regardless of interest rates – balancing this with flexibility of short term rates and some floating so that if things do get out of hand there is some remedy to fix to more certainty later as opposed to getting caught on the high as we did previously.
Won’t a lot of kiwi home onwers (and businesses, especially the farming sector) be trying to reduce debt similarly? As opposed to consuming or investing in growth? So won’t Bollard’s scare power and incumbent tighter monetary policy be enough to keep the heat out of the economy even with highly stimulating OCR levels and a lack of a tax regime “step change” from John this week?
i.e. What do people thing now about the economy driving the OCR up over 5% by 2011?
February 18th, 2010 at 7:21 am
Hi Bernard,
When is your next update on this subject? Ive got a decision to make soon…
February 18th, 2010 at 11:37 am
Just noticed, another bank dropped rates, hasn’t been mentioned here. Bernard, you seem to be quick in commenting only when rates go up
March 11th, 2010 at 10:37 am
Beeerrrrrrrrrnnnnnnnaaaaaaaaaaaaarrrrrrrrrrrrrrrrrrrrrrddddddddddddddddd where aaaaaaaaaaaaarrrrrrrrrrrrrreeeee yyyyyyyyooooooouuuuuuuuuuuu?
March 12th, 2010 at 8:11 am
All on floating now? til Juneish??
March 12th, 2010 at 1:25 pm
Could we please have another update post OCR news???