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Wholesale interest rates rise after RBNZ holds OCR (Update 4)
June 12th, 2009
The Reserve Bank’s decision to hold the OCR on Thursday and call on banks to cut their short term lending rates has been widely ignored by the banks and the markets in the first 24 hours after the announcement.
If anything, the chances of increases in mortgage rates has risen because wholesale interest rates rose on Thursday after the OCR decision and the Reserve Bank’s forecasts of an economy. Bank bill rates rose around 10 basis points and swaps rates rose between 9 and 25 basis points on Thursday.
Here are comments below from economists about the Reserve Bank’s (RBNZ) decision to hold the Official Cash Rate (OCR) at 2.50% on Thursday morning. (Update 4 includes Westpac comments.)
Westpac’s Brendan O’Donovan pointed to the rise in wholesale interest rates after the OCR announcement and said the Reserve Bank faced a difficult task trying to jawbone interest rates lower.
ANZ National Senior Markets economist Khoon Goh said that the policy cycle looked as if it had troughed, bar an offshore trigger that may force the need for further cuts. ASB economist Jane Turner said they had pushed out their expected timing of further cuts in the OCR to a 25 basis point cut in both September and October, which would take the OCR to 2%.
JP Morgan economist Helen Kevans said the timing of further moves was uncertain, but that “without a notable shift lower in shorter-term rates, or if doubts grow about the sustainability of recent signs of strength in the global economy, the RBNZ probably will choose to ease policy further.”
BNZ economist Craig Ebert said the BNZ thought the RBNZ “misjudged the impact today’s MPS will have on the markets.” Ebert pointed to a jump in wholesale rates that will put further upward pressure on retail interest rates.
Westpac’s Brendan O’Donovan
The RBNZ’s big fear, as spelled out in an alternative scenario in the MPS, is that the recovery manifests as a return to the imbalances that have plagued the economy in recent years: rising house prices driving an increase in household spending, while a stronger currency hammers the export sector (Fig 4). We think it’s a valid concern, since little has happened during the credit crunch to alter the relative appeal of borrowing versus saving – and record low interest rates for the foreseeable future certainly wouldn’t help. While the RBNZ didn’t publish an interest rate forecast for this alternative scenario, we can take it from experience that they would be hiking rates earlier and faster, not cutting further, in this environment.
Unfortunately for the RBNZ, the market seems to have decided that their very low interest rate projections strain credibility, and instead has latched on to the talk of recovery. The one-year swap rate has risen by 9 basis points, while two- to five-year rates have risen by 20-25 basis points. The RBNZ faces a difficult task in managing interest rate expectations at this point in the cycle, but we doubt that they would see any benefit in cutting rates again simply as an attempt to ’send a message’ to the market.
We expect the RBNZ to remain on hold again at the July OCR review. For now, we are maintaining our pick for further cuts later this year, reflecting our view that the global recovery still has some major hurdles to overcome: weak household balance sheets, vulnerable banking systems (particularly in Europe) and rising long-term interest rates. However, if the NZD moderates its gains, or global demand improves faster than expected, the RBNZ will be on hold from here.
ASB’s Jane Turner:
The RBNZ acknowledge signs of so-called green shoots, noting international economic activity is stabilising and international financial conditions are improving. The RBNZ also noted the recovery in the housing market and net migration. Nonetheless, the RBNZ continued to emphasise the weak economic outlook and that risks remain weighted to the downside. Inflation pressures are lower then previously expected and CPI inflation is likely to briefly fall through the bottom of the target band later this year.
While verbally the RBNZ maintained its easing bias, their 90 day forecast does not actually incorporate another cut. The RBNZ may think it has done enough for now and the threshold for further cuts is now higher. The Bank seems resigned to the fact the NZ dollar and longer-term rates are higher than would be ideal.
The RBNZ expects that the TWI will continue to fall to 52 cents, and with the TWI currently at 59.70 we see this as unlikely. As a result, we believe the RBNZ is likely to face downside risks to their projections for growth and inflation and at some stage in the future is likely to want to ease monetary conditions further. We continue to see the risk of further rate cuts. However, we have pushed the timing of these cuts out with 25 basis point cuts in September and October, bringing the cash rate to 2.0%.
JP Morgan’s Helen Kevans
The dovish statement accompanying the OCR announcement could have supported a decision to cut the cash rate.
The Governor acknowledged signs of stabilisation in the global economy and improving conditions in international financial markets, but said the risks on balance to domestic activity remain skewed to the downside, the main reason being the expected strengthening of the NZ dollar. Indeed, recent NZD appreciation has contributed to a tightening of domestic monetary conditions, with the currency up 10% since the last OCR decision on April 30. Further NZD strength, forecast by the RBNZ, will hamper any export-led recovery at a time when global demand already is weak.
…
Funding pressures have, however, eased, according to Dr. Bollard. One of the reasons we believed that a rate cut would be delivered today was that it may have prevented domestic banks from raising their mortgage rates, to compensate for elevated funding costs. The Deputy Governor recently highlighted the RBNZ’s disappointment that some domestic banks had refrained from passing on cuts to the OCR, but the good news is that households refinancing their mortgages continue to move onto lower mortgage rates, a trend that will continue over the medium term.
In our view, the statement accompanying the ‘no change’ decision today left the door open to further policy easing, if deemed necessary. As in the April statement, the Governor made clear that the OCR will be kept “at or below the current level through until the latter part of 2010.” There is scope for further policy easing – the terms of trade is falling, private consumption is weak, and inflation pressures have eased. In fact, the RBNZ expects headline inflation to fall below its target 1-3% range later this year. We believe that headline inflation will fall below target in 3Q09.
But, the timing of the next move, if any, remains uncertain. It will take a material change in the global outlook or a significant tightening of domestic monetary conditions to trigger a further reduction the cash rate. Dr. Bollard acknowledged today that there is room for further reductions in shorter-term lending rates. Without a notable shift lower in shorter-term rates, or if doubts grow about the sustainability of recent signs of strength in the global economy, the RBNZ probably will choose to ease policy further.
ANZ National’s Khoon Goh
While the RBNZ has left the door open for further cuts, lacking an offshore trigger, 2.5 percent looks to be the trough in the policy cycle. Absent a further material deterioration in economic prospects or a rise in systemic risks to the financial system, we believe this easing cycle is now over. This is despite the considerable wariness we have towards the NZ economy. However, facing a structural rebalancing process, there is simply some aspects to the economic cycle that policy cannot and should not respond to. Looking towards the potential normalisation in policy, we have pencilled in the start of the tightening cycle in late 2010, concurring with the elongated economic adjustment prognosis.
There is an inevitability about what needs to happen for the NZ economy to rebalance, and it includes a weaker currency. However, the issue is really one of timing. The longer the adjustment is pushed out (via rejuvenated domestic demand, especially the housing market, and a stronger currency), the higher the potential for a more severe correction on the other side.
We are siding with the RBNZ in viewing that recent tensions (and a rising currency) will not last long. However, for now, the market has taken the decision as NZD positive, gaining over 70pips against the USD and almost 100pips against the AUD. A lot of this looks to be position related and we expect global forces to dominate once again overnight. Swap yields sold off across the curve. While on the face of it this appears to be some cynicism towards the “lower for longer” message as yet, this looks to be more flow and expected mortgage related pay-side pressure.
BNZ’s Craig Ebert
The thrust of the Bank’s commentary was more in keeping with its 90-day bank bill forecasts, which flat-lined at 2.80% in yield. This flatly denied the further easing we thought this MPS might have projected for the near term, especially if Bollard held firm today. Yes, it was helpful that the Bank’s projections implied the OCR staying at a 2.50% low right the way into the second half of next year.
But that might get lost in the wash, with greater global forces now bearing upwards on mid to long NZ wholesale interest rates.
Part of this, of course, relates to the huge demand governments around the world are now placing on the world’s capital, as they struggle to fund the massive fiscal deficits that are so important for averting a deeper global recession and deflation.
In this respect, we suspect the Bank has misjudged the impact today’s MPS will have on the markets. It’s not as though its messages were unreasonable. But monetary policy never works in a vacuum. The Bank looked to be heeding this back in March, when its emphasis on slowing down the easing cycle was important in stopping the markets galloping too far down easy street. But today’s MPS would seem to have dropped the ball, in that it risks egging on the recovery-trade movements in NZ rates and the currency that were bound to happen to some extent anyway.
We need only look at today’s market reaction to get an inkling of this. Key wholesale rates have jumped by more than was consistent with removing the slight chances attributed to a 25bp rate cut today. The 1-year swap rate has increased 10bps, but the 2-year is up about 20bps in yield. These will put upward pressure on retail interest rates, at a time when assessing appropriate margins remains as complex as it’s been for ages.
But our broader concern is with the currency. It has already reacted “favourably” to the on-hold-with-recovery-on-top story the June MPS emphasised. Kiwi has put on more than half a cent, as has NZD/AUD.
…
(W)e’ve decided to take the June MPS at its word and run with the 2.50% OCR base it projects into 2010. But that’s not to completely abandon the downside risk to the cash rate we previously saw by the end of the year. We believe it’s something to keep very firmly in mind, albeit now as a strong risk rather than something we have in our central track.
Tags: Alan Bollard, ANZ National, ASB, BNZ, Craig Ebert, Helen Kevans, Interest Rates, Jane Turner, JP Morgan, Khoon Goh, Mortgage rates, OCR, Official Cash Rate, RBNZ, Reserve Bank of New Zealand
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June 11th, 2009 at 11:24 am
So what if Bollard cuts to 2%! The Yanks are getting a bloody nose job from Mr Market as they try to sell their IOUs to the rest of the world and end up flogging them to the FED for imaginery money. Bernake trying to hoodwink Mr Market that he can get the QE paper back out of the system before the bomb goes off. Fat chance of that.
The green shoots are just stinging nettle. Try running through them in the buff.
Are the debt laden employment worried public going to rush into floating? I think not. They might have been dumb in taking on the massive debts, for believing the garbage about property always going up in price, but they can see the trap Bollard is setting. He wants more on floating so his ocr increases will do real damage when they happen and that must be some time in 2010. That’s going to be some xmas present in 2010 Alan. For Joe Public, the options are, risk a boot in the bum from Bollard or the promise of higher long term rates that will not be dropping any time soon. Even the poorly educated can see the need to avoid debt now at all costs. Better to rent than be a serf to the bank. Getting out of a renter is a dam sight easier than a mortgaged property falling in value in a dying market choking on thirty years of debt. And remember, the floating rates will rise higher than the fixed when the RBNZ takes its big fat foot off the brake.
June 11th, 2009 at 4:13 pm
These economists sure have some nerve. Not one of them forecast this severe downturn, yet here they all are telling us about the “green shoots of recovery”.
All the economic bloggers in the US who correctly forecasted the GFC are saying that the Option ARM’s that are coming up for renewal from next year onwards in a huge tidal wave are going to be worse than the previous sub-prime crisis.
June 11th, 2009 at 4:57 pm
Interesting Times
http://www.nytimes.com/2009/06/07/opinion/07cohanWEB.html?_r=1&emc=eta1
Swedish banks need your deposits,
http://www.ft.com/cms/s/0/ad578092-55a8-11de-ab7e-00144feabdc0.html
June 12th, 2009 at 9:37 am
Very well said, Wally. You nailed it in a nutshell.
No justice as usual. The savers will get wiped out by hyperinflation down the track, many of the overindebted will be bailed out by the Obama’s of the world (for our children to payoff in the course of time), and a few will benefit through having their debts wiped out by inflation. If it all doesn’t lead to civil unrest or even war then we should be just fine.
June 12th, 2009 at 10:59 am
Shuttle tells us more about “Option ARM”
June 12th, 2009 at 12:05 pm
California Develops a Mortgage Tsunami Patter Reminiscent of the 2007 Subprime Collapse. Alt-A and Option ARMs Unite.
http://www.doctorhousingbubble.com/notice-of-financial-default-california-develops-a-mortgage-tsunami-patter-reminiscent-of-the-2007-subprime-collapse-alt-a-and-option-arms-unite/
Incoming!
June 12th, 2009 at 12:27 pm
Arguing over where interest rates should be is largely a waste of time. The RB has no control over the yield curve and no control over bank margins.
The main issue is unemployment. If you are employed you can usually cover your mortgage or rent. Once you’re out of a job that becomes a problem.
So the sector that really needs help is the business sector and how easy is it to get funding for business?
So great to hear that Kiva is now open for business in the US
http://www.usatoday.com/tech/hotsites/2009-06-10-kiva_N.htm
And who knows, perhaps coming to NZ soon??
June 12th, 2009 at 12:29 pm
It’s like a Tiger without teeth,
Like a Lion without it’s roar,
or
A cat with no claws ??
Either way, nothing in his bag of tricks seem to work .
Cutting his discount rate makes no difference to mid and long term rates that most Kiwis depend on….(and the Bankers are essentially showing him and the MPs their finger)
So either higher borrowing rates with a strong currency chokes the economy again or we slowly die a debtors debt when our foreign debt finally becomes unpayable…..like Iceland and now Latvia…..us next ??
June 12th, 2009 at 1:05 pm
The country needs increased productivity and that requires low rates so business can manage to apply more capital to its labour and create a high productivity high wage economy.
If the Aussie banks wont drop their rates then John Key and Bill English need to join the resistance and make sure KiwiBank and other local banks get more capital.
June 12th, 2009 at 1:23 pm
LowRatesGoodHiRatesBad – agreed.
http://www.interest.co.nz/ratesblog/index.php/2009/06/09/parliamentary-committee-slams-australian-owned-banks/#comment-25653
“We need Kiwi Bank to be recapitalized and start lending to our business sector and to be used as a macroeconomic tool for the Reserve Bank to help control the behavior of foreign banks. Imagine a New Zealand where Bank Profits stayed in our country, to serve our businesses, our farmers and our people. It’s just a thought. Perhaps if that happened we just might start to reduce our dependencies on foriegn capital.”
June 12th, 2009 at 2:36 pm
Fine in theory but what constitues good for the NZ economy when the government is involved. Also what stops that cheap credit for business/farms being transferred to retail spending, residential housing etc and restarting the current cycle of overpriced assets due to cheap credit.
You know the old good intentions with bank outcomes which will always result.
June 12th, 2009 at 2:53 pm
Bit of a devil’s advocate comment here, but If these overseas banks a creaming so much profit, why doesn’t the government take a shareholding in them and with the large profits made pump that into KiwiBank to lower the cost of lending in NZ.
Personally I don’t believe these banks are making the large profits and/or they still risks for the future.
Also perhaps higher lending rates for NZ is justified, perhaps the defaulting risks are higher that the Australian borrowers? If anyone has those figures it could be interesting…
June 12th, 2009 at 3:02 pm
1894: The BNZ saved by Government legislation.
1944: Government announces intention to nationalise the BNZ.
1990: Government bail out of BNZ for $380 million to avoid collapse.
1992: Government sells BNZ to National Australia Bank.
Looks like the government has already had several goes at running a ‘Kiwibank’…..
June 12th, 2009 at 4:38 pm
Janet – thanks for that info. It proves that we need less Government not more.
June 12th, 2009 at 4:44 pm
I don’t think we should confuse less/more government with the actual issuance and control of the national money supply.
June 12th, 2009 at 4:57 pm
Raf: why?
June 12th, 2009 at 5:16 pm
Because they are separate issues.
June 12th, 2009 at 5:18 pm
How so?
June 12th, 2009 at 5:18 pm
Les/LowRates
In case you missed it: On Kiwibank recapitalisation
http://www.interest.co.nz/ratesblog/index.php/2009/06/09/parliamentary-committee-slams-australian-owned-banks/#comment-25986
June 12th, 2009 at 5:20 pm
Because one does not determine the other.
June 12th, 2009 at 5:23 pm
I see interest rates are on the rise in Australia.CBA is the first to move and I think others will follow next week. Treasurer Swan is furious! Like Wally says, Stay away from debt!!!
June 12th, 2009 at 5:29 pm
Because one does not determine the other.
But if government did not control the money supply, then surely we would have much less government? Also, governments would not have the ability to raise debt/borrow, thus could not grow in size at our expense, financing their dream society (which is ending up my nightmare)?
June 12th, 2009 at 5:49 pm
raf – seen, thanks. Will study later
janet – Noted. Why can Auz insts/gov perform better than NZ insts/gov?
June 12th, 2009 at 8:39 pm
Mark,
It depends how the money supply was created. As it stands now the debt creation model is a disaster, for many reasons. But if government were to actually create all the money (imagine physical notes) then there would be a fixed supply of money which always existed, as opposed to debt money, which is what we have now. So in a way, the money supply would be issued interest free (unlike debt money), and be controlled in quantity so as to preserve its value (unlike debt money which is controlled by interest rates – which we have now and doesn’t work).
One could still have a smaller government, in terms of the amount of that money consumed by government falling over time. With the removal of much of the interest burden taxation would fall also considerably and much of the government bureaucratic structure would contract as well.
My point is that the money supply is distinct from the size of government. However, a move to a government issued supply of money will actually lead to a smaller government.
That also does not rule out a future move to non-government issued currencies such as local systems, time banking, barter units, peer to peer systems and other alternative approaches such as commodity issued money etc.
I hope this explains the distinction I was trying to make.
June 12th, 2009 at 8:56 pm
Raf,
good post.
In my opinion under the current system at the moment the Government does not control the money supply.
From http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1lawrence.pdf
The RBNZ controls the OCR. But that is about all.
There are no effective regulations preventing the banks from creating as much money by way of credit as they wish.
Have a read of Steve Keen’s roving cavaliers of credit for more information on the debt creation fiasco
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
June 12th, 2009 at 10:00 pm
shuttle – governments running banks is not the issue, it’s banks running governments. You need only look to USA to see where that leads.
raf – all good stuff that you are presenting but you know very well that there are powerful “vested interests” that will dispute all of it. To advance your arguments you need to explain who those vested interests are and why they oppose monetary policy reform– try doing that without being labelled a “conspiracy theorist”!!
June 12th, 2009 at 10:51 pm
Very intersting discussion. I suggest a book by JohnPerkins, Confessions of an economic hitman, allegedly true story.
June 12th, 2009 at 11:14 pm
raf. It’s been a long week, so I leave for now this link regarding fractional reserve banking:
http://www.lewrockwell.com/rothbard/frb.html
Back at end of weekend, or after …
June 12th, 2009 at 11:26 pm
Wait a minute. Also: http://en.wikipedia.org/wiki/Debt-based_monetary_system
Quote:
Criticisms of fractional reserve banking have been put forward from a variety of perspectives. Critics have included mainstream economists such as Irving Fisher,[1] Frank Knight[2] and Milton Friedman.[3] However, few if any mainstream economists now endorse such views. Within the economics profession, most criticisms are based upon non-mainstream economic theories such as those of the Austrian School. There are also critics from outside the economics profession, for example, author Michael Rowbotham, and libertarians who favor the free banking or full reserve banking.
…and
http://en.wikipedia.org/wiki/Austrian_School
Read section entitled ‘Inflation’.
June 13th, 2009 at 10:23 am
I posted too many links. Sorry – I hate people who do that. So, just the one paragraph from the Rothbard (first link above):
“Thus, the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately.
It is only the Central Banking system that makes fractional reserve banking possible, and it is this system governments use for controlling, read pumping, the money supply.
It works because ‘it is understood’, when private banks ‘go down’, the government will step in and print the money to bail them out – as has been shown in this crisis, for example, Northern Rock.
Given this, I believe your conclusions are wrong Raf. You cannot separate fractional banking from central banking and government size and control.
June 13th, 2009 at 12:39 pm
Why are there still so many people on threads like this that think that the banks cost of funds is dictated by the OCR ? its not, they don’t fund from it and people that make such comments as above just appear stupid to anyone half informed (the nature of blogs I suppose) ……Give more capital to Kiwi Bank ? give us a break, they have a similar cost of funds problem, and when they become a large enough lender, rather than a minnow, unless NZers have started to save by then, they too will have to pay the yet higher price of borrowing offshore.
June 13th, 2009 at 1:35 pm
Gibber,
Thanks. Though I don’t know where they get that 80% number from. It’s nonsense.
Neil C,
Yes the vested interests are strong and democracy is weak but there are ways. Every system has an Achilles heel. You just have to know where it is
Mark,
Thanks for all the links. As it happens it was Mike Rowbotham who first got me thinking about money creation when I attended a lecture of his back in 1998 (shortly after I decided to leave banking). I have Rothbards’ books as well. I’m also very well aware of the libertarian viewpoint and the Austrian school.
Your point about the corruption and collusion of government and banking is well made. I could blame it on the Dutch and the Orange Revolution but really it’s just the usual stuff of power, greed and self-interest.
Still it doesn’t have to be that way.
- The sovereign can issue the coin of the realm.
- Then financial institutions can offer whatever services they like – storage, loans etc.
I believe this change will take us to what you desire which is less government, more efficient government and less costly government.
Jack,
Actually from what I have seen there are many informed people around on this blog. They may not necessarily agree with each other (other than that the current system is not working and we are too far in debt) but most have a fair idea of what they are talking about and there are some experts around also.
I’m not sure your comment has added much to our information.
June 13th, 2009 at 2:56 pm
So when eventually the OCR starts to go back up, I assume banks won’t raise interest rates based on that because there is now no relationship between the OCR and mortgage or any other interest rates in New Zealand.
June 13th, 2009 at 3:12 pm
Raf, where did you head after the banking career?
June 13th, 2009 at 3:19 pm
Gibber – “at the moment the Government does not control the money supply.” And that is a major problem, as we’ve discussed in other threads. See:
Monetary Policy problems sit with MP’s not the banks
at http://www.mea.org.nz/media/pressreleases.aspx
“The RBNZ controls the OCR.” – interesting definition of control…
Cheers, Les.
Marie – look, we are trying our best here, I think your’e asking just far too
much…
PS – what do you think of that lizard in top-right corner of that MEA page?
June 13th, 2009 at 3:24 pm
Raf – Apologies, I agree, my comments weren’t constructive, they were full of frustration – I have spent plenty of time detailing the situation in other blogs and just didn’t feel like revisiting it once again. But please don’t get me wrong about the quality of bloggers in general, many are very intimidating knowledgeable in alot areas, and I learn alot like most of us – many seem to be like me, comment with conviction in the areas that are clearly their expertise (bank funding is one of mine), but unfortunately a few seem to think that extends to all areas
Marie – the OCR initially had relevance on the way down, as it usually does, but only until it reached levels where retail depositors effectively demanded returns well above OCR – the relevance then went out the window – a once in 80 years event (well 10 yrs since that’s as long as we’ve had the OCR). When the economy recovers, and banks start fighting again for market share, you may initially be right, it may actually lag a bit on the way up, but ultimately all the old relativities will return
June 13th, 2009 at 4:00 pm
Jack,
I understand your frustrations and appreciate your reply. I also think it’s important to keep repeating stuff because that’s how people learn and this blog has done a lot to educate people and engage them in the murky waters of monetary matters.
I agree the OCR debate is a red herring.
Mark,
After I left banking (2000) I helped start up this company http://www.trucost.com and got involved in the money reform movement in the UK helping draft an EDM for Parliament. Then moved to NZ and helped start up this company http://www.vortexdna.com
Went back to Uni and did a degree in political science and started this http://www.sustento.org.nz Also am an angel investor and volunteer.
I think I’m classed as a social entrepreneur these days.
June 13th, 2009 at 5:22 pm
Hi Raf, I have learnt heaps from this site and continue to do so, do you offer loans to Kiva?
June 13th, 2009 at 5:53 pm
Hi Steve,
Good to hear the site is useful to you.
Yes I am mad about Kiva and am a regular lender. Join us at http://www.kivakiwis.org/Our_People-_Lenders.html if you are not already a member.
My last blog post was about Kiva as well.
http://sustento.org.nz/kiva-game-changer/
June 14th, 2009 at 9:49 am
Thanks Raf, I will look into it.
June 14th, 2009 at 8:03 pm
Bernard: You like charts, Ok how about some projections on floating (5.99%) v 8% fixed for 5 years?
I did this myself but Im no expert on the subject…
So I took a $100,000 mortgage for 25 years at 8% for the first 5….a monthly payment is $771.82, that adds up to $46309.20. If you stay at 5.99% for that period its $643.69 a month or $38621.40. So going fixed if the rates dont rise is going to cost you $7687.80 more….I then took a 0.25% increase every 6 months (staying flat for a year first) in the floating…thats still $4333.74 cheaper…..I then took 0.5% per 6months, its still $652.14 cheaper. Basically with mu rough calcs unless the floating rate starts rising at 0.5% per 6 months within 6 months and does it for 5 years straight floating still looks a better bet….so fixing at 8% today does not look cool….am I right?
Q: Is raising the OCR at 1% a year overly agressive? anything less and floating looks like winning…ie 8% was too high to fix at….
Marie: That’s the implication on how I read it…ie a rising OCR wont effect the floating rate (yeah right)…If other countries have serious [hyper]-inflation as they are money printing and we dont then I assume investing in NZD becomes attractive as the investors money holds its value (somewhat anyway)….however our exporters are hammered as the exchange rate climbs….0.62 is high enough given depressed exports.
Long term mortgage rates have to rise as all the bonds/gilts return rate rises as no one wants them…..ikky…
regards
June 14th, 2009 at 9:16 pm
Here’s an idea I have that could radically alter the way people borrow from banks, and could make banks more competitive. It promotes an idea that will allow homeowner to easily choose multiple banks and/or change banks to ones that provide the best options for the homeowner. The idea is homeowners can select funding providers as easily as other utility companies:
I propose that the government creates a sanctioned independent body purely for the valuation of properties. It may incorporate existing credible property valuers (given property valuation already occurs, funding for this shouldn’t be excessively high). This independent body provides a certificate of valuation to the homeowner. This certificate of valuation would be periodically marked to market and reviewed at the homeowners request (e.g. if the homeowner made improvements).
The homeowner can this take this certificate of valuation and divide it up to obtain finding through one or more banks. As any loan term finishes, the home owner can easily change to another bank if they prefer. They may like to have floating at one bank and fixed at another, etc.
From the bank’s perspective they will know exactly the value of what they have lent on (making it far easier evaluate risks), from the homeowner’s perspective more flexibility.
June 15th, 2009 at 8:16 am
Sam wants to increase the state sector payroll by, oh about three thousand! Well done Sam.
June 15th, 2009 at 8:40 am
But we need more ideas to make borrowing much more money even easier, Wally!
June 15th, 2009 at 9:09 am
We do!
June 15th, 2009 at 9:13 am
Here’s some explosive news just off the keyboard, the NZ Labour Party is going to establish its own bank. Members can deposit their savings, if any, and borrowers can expect rates a full 1% below kiwibank. Way to go Cunliffe. Line up folks. Come one come all. Membership forms for the NZLP are here on your left. Not many in the deposit line I see.
June 15th, 2009 at 10:18 am
Wally, we can suggest ideas, they may or may not fly. They may require a few iterations to make them workable. They may be a basis for other ideas. In any case ideas should be encouraged.
Personally I’m not a fan of more state spending, however I believe the following:
Property valuations already occur, the change is private sector spending versus public sector spending – i.e. the money is already being spent. Who knows a large nationwide service solely focused on property valuations could be efficient. There is an alternative option where property valuations would occur in the private sector but under tight government regulations. It is a case of choosing the best option, cost to implement, how well it meets the goals etc..
This whole idea hinges on “buy in” from the banks, the property valuations need to be of a high quality and accurate. Banks simply won’t lend on valuations they don’t trust. While I’m not a big fan of public spending, I believe some form of government backing would be required for the banks to be interested.
Who knows, if the property valuations developed a very good reputation, there is no reason why we couldn’t see in the future homeowners securing funding internationally – then we would see some competition!
June 15th, 2009 at 10:26 am
Where do you think the majority of our housing funding comes from already, Sam? It’s not from our huge domestic savings base! It already is internationally funded…
June 15th, 2009 at 10:34 am
Oh, And if by “there is no reason why we couldn’t see in the future homeowners securing funding internationally”, you mean directly; themselves; armed with a “property valuations .. of a high quality and accurate.” I’d suggest that its hard enough for the average homeowner to manage his cashflow and ‘guess’ at interest rate movements ,without having to worry about exchange rate movements and hedgeing.
June 15th, 2009 at 10:35 am
Don’t go there Sam. It smacks of Helen style “auntie knows best” how you should should live your life. What you see as a small govt body would soon morph into a bloated burden. We need to get rid of bloated govt depts and reduce expenditure, not grow the thing. The current mess with valuations already has regulations and they are useless. The truth is there are no truths when it comes to valuations and better to drum that fact into the skulls of property buyers, than build another govt pile of waste.
June 15th, 2009 at 11:06 am
Raf, June 12 209: 8.39pm
Sounds like a recipe for crony capitalism such as exists in Saudia Arabia today, under the laws of Sharia.
What incentive would one have to forego consumption today and lend state issued money cornered through a government sanctioned monopoly?
I get a sense of feudalism if not outright fascism from your ideas, Raf.
June 15th, 2009 at 11:55 am
> Where do you think the majority of our housing funding comes from already, Sam? It’s not from our huge domestic savings base! It already is internationally funded…
Yep I realise that, sorry I wasn’t too clear in the way I wrote it. While the majority of funding is sourced internationally, it is channelled through a relatively small set of retail banks to NZ customers. What I’m saying is if the property valuation was reputable, then that could open up a larger set of larger set of international retail banks to NZ customers.
>I’d suggest that its hard enough for the average homeowner to manage his cashflow and ‘guess’ at interest rate movements ,without having to worry about exchange rate movements and hedgeing.
While that is true, homeowners that are not comfortable with FX movement, would simply stay with their current AUS/NZ bank. However for those that do their research and have the skills it expands the options available to them. For those people it would make it easier to manage their home and IPs as part of their overall portfolio along side other asset classes (rather than property being such a special cases).
I think it is only a matter of time before we start to see some interesting developments in this space – today I look at (and use) international companies that provide international share/commodity/bond trading and I’m impressed, 5 years ago these simply we not available to NZ’ers. Who know what the next 10-20 years hold…
June 15th, 2009 at 12:19 pm
Sam – interesting ideas but I don’t see this working that well in practise.
Opening up NZ’ers to the idea of borrowing in currencies other than the Yo-Yo (my new name for the NZ dollar) is a recipe for disaster. Witness Argentina in 2001, Latvia (right now!), Hungry (right now as well!).
We are financially illiterate enough, I don’t think we could cope with taking into account two variables (exchange rate + interest rate).
June 15th, 2009 at 12:26 pm
“today I look at (and use) international companies that provide international share/commodity/bond trading” good for you Sam, hope you know how to spot a Madoff when you smell one. I prefer to use a leading NZ based brokerage and confine my gambling to the aussie rorts which are bad enough.
June 15th, 2009 at 12:28 pm
International Banks won’t come here just to do business with the retail market, Sam. Witness Austalia, when it openened up to international banks in the ’80’s. It seems like a good idea to them, until they realised there really wasn’t enough business to support them all ( Hey! Even ‘international’ BNZ went at it hammer and tongs there….. and sent themselves broke!). Our market doesn’t rate in any way you want to mention. That’s why ‘our banks’ are, by and large, just branch network offices of the Aussie banks. Cheers.
June 15th, 2009 at 12:54 pm
Ok, talk of international retail banks and FX has just complicated the discussion.
Lets take one step back – lets say I have a house, I’d like to take out mortgages as follows:
1/2 the loan floating through KiwiBank at 5.99%
1/2 the loan fixed 5 year through Westpac at 7.90%
What is stopping me doing this and how could it be solved? I believe if this could be done, it could increase the competitiveness between banks.
June 15th, 2009 at 1:01 pm
Nothing stopping you that I can see? Have you asked them?
June 15th, 2009 at 1:05 pm
Sam
One will have the 1st mortgage and the other will hold the 2nd mortgage (making it more expensive).
Does this sound right?
June 15th, 2009 at 1:14 pm
“it could increase the competitiveness between banks” oh well we can’t have that happening can we old chap. I mean to say, threatens a chaps profits ay what. Sam, in all honesty I think you stand a better chance of meeting ET in the next 12 months than getting an increase in the competitiveness between banks.
June 15th, 2009 at 1:42 pm
> One will have the 1st mortgage and the other will hold the 2nd mortgage (making it more expensive).
Yeah, not so keen on more expense. I was more thinking 2 x 1st mortgages, with each bank having writes on the proceeds in the event of a mortgagee sale for the proportion they lent on…
Perhaps it is easier to just buy multiple properties and fund them through multiple banks. …and add to this few shares in the different banks to help me with the profits they make
June 15th, 2009 at 2:00 pm
Hint Number One, Sam: Don’t mention ‘rights at mortgagee sale’ when you go in to negotiate the loans…….
June 15th, 2009 at 2:03 pm
I am no expert on any of these matters – just a debt laden homeowner.
However the property valuations part of the above discussion interests me.
Why do we need a property valuation sector in the first place? Do overseas countries have these? From my little experience property valuations are not accurate. Kiwibank looked only at the CV/GV/whatever of a property when considering my loan application ( as well as ability to repay of course). I have in the past objected to my council valuations and had the valuation changed to exactly what I believed was the correct value- similarly my neighbour.
Property valuers (members of the Property institute) consider council valuations when valuing a property. I think this area is a bit cloudy.
June 15th, 2009 at 2:10 pm
My guess is that you objected to you valuations being to low, Marie? In which case you are subjecting yourself to higher council taxes. If I am mistaken, then the lower the RV the better.
June 15th, 2009 at 2:13 pm
No lower of course-precisely because of council taxes. Backfired a bit when it came to re-mortgaging though in terms of the how the bank saw the value of the property – swings and roundabouts!
Had enough equity and all that – but bank saw the CV as the value which is something that can be determined by the property owner. I just find this bizarre.
June 15th, 2009 at 2:33 pm
Marie, it’s a system encouraged by those who guess at valuations on the grounds that valuations are needed because without them, there would be no demand for valuation experts and they would have to get real productive jobs.