Following some clear signals, wholesale swap rates rose sharply yesterday (Thursday).
First, the US Fed removed almost all doubt that would be ending bond buying and hiking the benchmark rates in March.
And the NZ CPI came in above expectations, confirming inflation is enemy #1 for the RBNZ. No one now thinks the February 2 labour market data will show anything other than that part of their policy mandate has been satisfied.
So all is clear for the RBNZ to raise their policy rate again on February 23.
Financial markets are convinced.
Bond yields rose worldwide with the Fed signal.
Wholesale swap rates rose locally with the CPI signal.
The rise was +5 bps to +7 bps in the 1 to 3 year tenors - from the prior day when they rose as well.
That takes the one year swap rate to 2.00% and +35 bps higher than when the home loan market wound down for the holiday break in mid-December.
The two year swap is now at 2.49% and up +25 bps over the same time frame. The three year is now at 2.70% and +20 bps higher. But the two and three year swap rates are really only back to where they were in late November, which was when the current two and three year mortgage rates were established.
The last time there was any mortgage rate rise in the market was in the week of November 26, 2021.
Prepare for a general rise in fixed rates, probably before the RBNZ's February 23 MPS review. The most vulnerable rate rise is for a one year fixed home loan. At this stage the two year and three year rates are less vulnerable until rates rise further from here. (But ASB's two year 4.15% rate which is -20 bps lower than their main rivals might be an early casualty.)
Financial markets are pricing in higher rates.
Who will be first to move up?
Daily swap rates
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112 Comments
Check this out : Fed Has Misinterpreted Inflation, Lacker Says
Saying misinterpret is being polite. Should be manipulated as most governor of reserve banks have inflated ego and in process screw the economy - long term.
Pandemic came and will go in a year or two but scar left by this governor's will be felt for years to come, impacting lives of many.
They should be held responsible, just like surgeon doing surgery - no real accountability and politics allows them to get away.
Who is going to hold them responsible or undo any of what they have done? No one.
If National are voted in they are a party of property investors who benefited from the last two years' welfare wealth transfers. All that will happen is continuation.
We'll need other parties and voices to stand up against the two Natbour parties on such issues.
I find it alarming that there is any sort of 'surprise' in any of this. A global pandemic hits and emergency financial decisions were made to prevent economic harm, recession etc (some pretty poor financial decisions but thats another conversation). So things are now going back the other way (admittedly quickly because we over cooked it) and people are panicking?
If you accumulated vast amounts of debt at 2.5% thinking that rates were going to stay that low for any amount of time and you can't support that debt even if we move to what would be considered a more 'normal' rate of 5 or 6% then you will just have to deal with it. Too many people have made stupid financial decisions in recent years on a whim or FOMO and there may well be some consequences coming.
The question is whether free market risk and price discovery will be allowed this time around? Last time around the RBNZ outright stated their worst case scenario is house prices falling, before removing LVR limits and pumping the market.
Will they allow free market risk to apply next time? Or will it be considered another emergency that requires rescue?
But if OCR is not hiked to where it should be, there could be an extra $200-350pw on cost of living for everyone anyway due to inflation, potentially the retail interest rates go up more too, which one is gonna be more helpful if everyone is sick at home with the plague?
That's a point that most miss.
Putting up interest just shifts the cost to where it should be - to those that borrowed (often for greed) Not putting up rates means the burden falls on those who have not borrowed to the eye balls (the frugal and non asset owners).
We have subsidised the housing ponzi over all else for too long. It's time the borrowers paid the piper - and not the rest of us.
What most people are missing is that intelligent ones paid off more during the times of low interest rates and now have more freedom to live their life and can spend more. The Darvin's dumb went down the FOMO lane and bought more debt for themselves and that lot is a very small number compared to those who paid off more to make their life simpler.
So higher interest rates will help majority of the people because they won't be putting more money in their non moveable asset but more into economy and probably enjoy life too.
Hence leave your scare mongering behind and most balanced interest rates for any growing economy is between 6-8% and that is where we will be.
Could indeed happen. Our economy will be toast if it does, especially the house building sector.
Selling a 2 bedroom shoebox for 600k at 3% interest rate, two years ago, is one thing. Trying to sell the same shoeboxes for 800k- 850k at 6% (or even 5% for that matter) is quite another....just get your mortgage calculator out to see!
No wonder the clever people have escaped the RBNZ! It ain't gonna be pretty.
You could very well be right, but I suspect it will go higher.
I get on very well with my mortgage manager at the bank.
I wanted to purchase a holiday home late last year, and he advised against it (but did approve the money regardless). I didn't go ahead with it in the end.
My mortgage manager told me he also wanted to purchase a holiday home, but he would wait until higher interested rates really really burned people and he would pick up one later when they are much cheaper. He said interested rates would go up sharply in the new year, and expected it to happen quickly.
I fixed all borrowing on the low 3s, for 5 years prior to this conversation as I could see what was about to happen anyway.
It is going to be very tough going for many this year (and next also) that thought this cheap credit party would last forever. Interest rates 7-10% would be my pick at peak.
I could pick 7 to 8% for longer term interest rates but not for 1 year rates. If that does happen, then yes as mentioned above the economy is toast and we will be in a Recession before anyone knew what him them and create absolute carnage that no one will be safe from. I would also think personal lending would be very hard to obtain especially if we are falling to pieces.
It would be interesting to see how we will compare to the rest of the world over the year, will they inevitably follow similar path to NZ or will they be able to avoid high interest rates and possible recession etc.
So it was a bit like saving up for a rainy day, the forecast said rain was coming so we cracked into the 'rainy day fund' and had a big spend up but the rain didn't come? Now it seems we actually do have some rather heavy rain coming our way but no more $$$. Moral of the story, don't assume just because someone holds a position of power that they have any idea what the hell they are doing.
Lowering rates wouldn't have been a disaster if they had retained (or raised) LVR limits, and ensured DTI limits were in place. This would have meant people with existing debts would have had reduced servicing costs at a highly stressful time, but would have stopped people taking on new debt at rates that were always going to be temporary.
Sad part is, that wasn't the intention. The intention was to create as much new debt as possible, to "boost" the economy. Short sighted with no regard to those who will be most heavily impacted (new first home buyers). It was a short term panic fix, as the RBNZ know they have created a highly unstable financial bubble - they think "financial stability" consists of ensuring it doesn't blow up in their face immediately, rather than ensuring we have a completely stable and resilient financial system able to withstand financial shocks.
Good article DC, I agree logic dictates a lift in rates and quickly. That said I have thought that for a while and the Fed and RBNZ have just double/tripled down on ever cheaper debt inflating an ever greater bubble. I have lost confidence in their ability to act logically.
Using this bubble graphic http://static.businessinsider.com/image/515dc7c669bedd430400000a, I suggest we are still somewhere between the "delusion and denial" phases. Many are very worn out/delusional at the market, and all the bulls are in complete denial thinking the fiscal mismanagement of the last ten years must continue because the bubble is too big to fail.
Lets speculate for a moment the Fed actually acts normally and leads central banks into a extended period where interest rates again exceed inflation (the long term norm). Aussie and NZ will have to follow. What does 7-8% interest rates (again the long term average) do to the piles of debt dumped in assets?
The changes in the US equity markets this year is a hint. They went straight to the "fear" phase of the bubble model, also know as FONGO. As stated yesterday shares can be exited in minutes, housing is quite different.
Survival of the fittest is true but just like drug peddlers deserve strict punishment for promoting so does........
It was evident last year that greed under FOMO was at peak and instead of addressing it, went all out to promote......
In a crisis, should have supported existing debt instead of promoting new in crisis, unless they had taken upon themselves to print and serve for ever.
Basic thinking was wrong. IN CRISIS NEED WAS TO SUPPORT EXISTING DEBT INSTEAD OF PROMOTING NEW CHEAP TO ONE AND ALL KNOWING THAT FUTURE IS UNCERTAIN.
Pandemic was a natural crisis ( if we rule out China theory) BUT economy crisis has been created by .....
With respect HM your the No1 guy on here saying rates will not and can not rise. Its now pretty clear that regardless of the factors that are right in front of you, the bigger picture that most are not looking at require rates to start climbing. Rates should have started returning to preCovid levels a year ago and we wouldn't be in such a mess now. Its a total cock up, people have got themselves in debt up to the eyeballs thinking these low rates were here to stay.
It doesn’t cost that much to build a house if you are smart about it.
I built one, but not the crap that people Build in Nz where the design and quality is an embarrassment.
It’s a large home, 320sqm with top of the line fit out, all rimu, tiles, all the mod cons, but the expensive stuff I imported from all over the world, and did a lot of work myself (while still doing a full time job).
in the end it cost 750k to build, but it’s insured for 1.5 million, because to build it and pay the local prices for all the materials cost that much.
the secret is just to bypass all the moronic local suppliers of building materials in this shithole country and just import stuff from elsewhere.
I had never done it before, but it was actually really easy to procure all the stuff, have it delivered and the employ really good builders to do the actual work. I was importing high quality stuff for 15% of the cost of the same products here.
It was easy.
Yeah. I've shifted from HM's thinking (they can't raise rates, the bubble is our economy) to thinking they'll have to raise rates. Inflation is real. And the NZD will continue to weaken against the USD, making tradeables more expensive. Look at the global risk-off mood; always bad news for the NZD... on top of which we have an economy that is dependent on low interest rates in a global rates-up environment. It'll be a choice between saving the housing market and saving the dollar. They'll sacrifice the NZD to save housing to an extent, but I think the NZD will be dunked a lot harder than anyone is predicting at the moment and force them to raise more aggressively.
They are in damned-if-you-do-damned-if-you-don’t situation aren’t they? Over-leveraged investors can’t sell their newly acquired investment properties without paying a huge tax bill (because of brightline test) but they are also nervous about impending market crash?
True that it's just a percentage of the profit. But if e.g. they're sitting on a 30% gain and are in the 39% tax bracket then selling now and paying BL tax would be equivalent to selling later for 9% lower price and no BL tax. Add in commissions and it's more like 11-12%. Do they think that prices will drop by more than 11-12%, that's the question.
yeah, if you are coming off your term now, AND think high interest rates are unsustainable (as I do, a minority view), then you might fix for one year, then look to rates coming down by this time next near and re-fixing again.
I come off one year in late November, I will monitor things and keep an open mind but I expect to float for a few months before fixing again in February / March next year once rates are lower again.
But a lot could change by November, so staying flexible and open minded is key.
HM,
You are not entirely alone. With no debt and lots of cash, I should welcome much higher rates and they will certainly go higher. A 2% OCR will not surprise me, but I think that in 5 years, rates will be falling again.
All my TDs are very short-term to take advantage of increasing rates, but at some point, I expect to shift to longer terms.
If I am wrong, and the RBNZ hikes repeatedly and aggressively to say 2% by August/September, then I can't see any other reality to the economy getting whacked. Now, that might help inflation quite a lot, but it will obviously come with a lot of economic pain.
That's why, under this scenario, which most people seem to think will happen, the RBNZ will actually need to start cutting the OCR by year's end or early next year, to try and resuscitate the economy.
A marked recession will kill inflation.
It is entirely rational to have that expectation. Since the early 2000s we've been conditioned to expect a rescue from the central banks every time the markets and the economy (because of its high degree of financialization) stumble. The Greenspan put was followed by the Bernanke put was followed by the Yellen put and finally the Powell put. The key question is, will the central banks run to the rescue again? In NZ, would a major housing downturn bring inflation to within 2% (what about imported inflation?) enabling RBNZ to cut rates. Would a housing-driven recession in NZ kill inflation imported from overseas? Would RBNZ depart from the tightening path followed by the FED? I don't know...
absolutely agree - stagflation defined as a stagnating economy whilst inflation is considered to be considered high or out of control.
Given the economy is definitely starting to stagnate and will continue to under the red light traffic system - and we have the highest inflation in 30 years - it will get worse before it gets better.
Yes and the smart people should have been smashing their mortgage over the last few years but I'm really shocked at the numbers on interest only. There is every indication now that rates will return to historical averages and people that couldn't be bothered to start paying down the principal on their million dollar house are going to get smashed.
The interest only loans are the scariest to me as well.
I had a conversation with a colleague last year, after they purchased their first house. They were talking about the fact they bought it on interest only terms, and they explained "we couldn't really afford it, but we felt like if we don't buy now we will miss our chance forever."
Scary as shit if this is more than just a 1 off anecdote. I know everyone will claim "Banks stress test at X%", yet the CCCFA rules have shown banks stress test based on claimed expenses, not actual expenses.
The big rates normalization event has just started. Be ready for significantly higher interest rates, with further surprises on the upside.
This is structural, and it is going to be a medium term phenomenon, not just a short term event - central banks have over-expanded the money supply, kept an over-loose monetary policy for too long, and now for the next few years at least we will see higher interest rates, as inflation is appearing again, as a natural consequence of past policies.
Hoping that interest rates will come down again in the short-medium term is pure wishful thinking not supported by the facts and in clear contradiction to what swap markets are clearly indicating.
Specufestors and mortgage holders are in for significant pain, that's for sure. They will bear the brunt and pay much of the price for the necessary rebalancing of the economy that is going to happen in the next few years.
100% agree. Those that are overleveraged and overextended are going to have to bail out of the market. The thing is I still don't see a housing crash with costs rising across the board, in fact I still expect single digit house price increases for 2022. There will be some serious lifestyle adjustments for those who want to stay in the game. Its not impossible to do at one point 80% of my take home pay was going towards a mortgage, you just have to suck it up for a few years. Short term pain was most defiantly long term gain.
Your opinion is one I see serious holes in.
Apparently, you don't think aggressive hiking of the OCR will lead to a recession and significant increases in unemployment?
Because a recession and much higher unemployment would force a significant number of people to sell property, whether it's their own home or an investment property.
Then who is going to buy?
So I see two scenarios:
1. Small increases to the OCR, to say 1.75 maximum, and moderate drops in house prices (5-10%) - this is my forecast
2. Large increases to the OCR, to say 2.5% plus, recession and higher unemployment, house price drops of 25-30%.
You seem to go with scenario 2, but with house price increases?
Please explain.
I'm not the OP, but I can see this happening. I would expect large OCR hikes to cause recession, but that doesn't have to mean big price falls.
Both NZ culture and banks will encourage mortgage-holders to eat a lot of s**t before selling at a loss or forcing foreclosure. People who have bought $1m townhouses in Greenhithe will hit the foodbanks and drive Uber after hours before abandoning the dream. We're collectively stupid and stubborn enough to maintain insane house prices at the price of widespread middle-class poverty. So look for a big increase in foodbank use, benefit fraud, tax evasion, fraud in general, a lowering in the cost of sex workers, and collapse of the hospitality industry... rather than drastically lower house prices.
I'm torn between this scenario and the one where the market rationally reprices property. <shrug>
Thanks for your opinion. I don't agree with it though :) There will be many people with their own homes or investments who will still be well ahead of the purchase price even if they sell 30% lower than current market peak.
I also think once the problems start, there will be a downwards spiral that is very hard to stop - unless the RBNZ cuts the OCR!!!! (that's why I think the ultimate outcome will be the OCR increases being reversed, late this year / early next year, with the chances of that happening greater if they hike above 2% by August)
The penny finally dropped for me in September 2020.....The is no "Logic" in the housing market and once you understand that you realise it simply doesn't react as you would expect. Housing is the Kiwi obsession, every single thing will get eliminated in order to keep the house. Discretionary spending will crash so sure its going to be really bad for cafes and restaurants. People will simply have to pull their heads in and stop spending in order to hold onto the house.
Fair enough, I don't agree. This time is different, in my opinion. There's no get out of jail card this time.
Either the OCR is not raised so much, and there is damage limitation to the economy and the housing market but inflation is only tamed a bit (my opinion) OR
The OCR is raised a lot, inflation is tamed but there is carnage in the housing market and economy.
If I am wrong and you are right - the OCR is raised a lot and house prices rise let alone fall - I will join you in agreeing there is absolutely no logic whatsoever in the market.
Lets see how it pans out HM. I see rates going up through 2022 but the pain will not show until 2023. The reason for this is the huge percentages of mortgage renewals falling this year and the brakes on spending will roll into next year when the emergency savings is gone and the credit card bills start rolling in. Its very hard to cut spending and some peoples idea of "Must Haves" in life are truly eye watering.
2022:
-RB forced to return to dovishness by housing market softness?
vs
-RB forced to raise rates beyond the current schedule by inflation?
vs
-RB keeps to schedule, no major dramas?
I wish this comment section could do polls. More specifically, I'd like to get votes from the commentariat here and see how opinion fared vs reality at the end of the year.
It perhaps shows that despite a lot of hot air about increasing rents, landlords perhaps have limited ability to do so.
With young kiwis likely to depart for Aus, with unemployment likely to rise and see young ones return home, and with tonnes of housing supply being delivered landlords might think very carefully about rental increases.
Be careful!!!
Kiwis come and go, unemployment rates went up and down but for the last 18 years, the compounded annual rental growth rate in the country is about 5%.
I don't see any strong reasons why the long term trend will change anytime soon.
The population in this country is not stagnant.
COVID and its lock-downs hit central cities the hardest in the any real estate markets around the world. Taking a sub-set of a market to infer the whole market is problematic. A trend is already established that as central cities are experiencing a decline, suburb and outer suburb properties are experiencing tremendous growth- and that's not unique to New Zealand.
I’ve read the above comments with interest. I agree that increasing interest rates are inevitable due to high inflation but wonder if the following should also be considered-
1. Inflation will also push up rents (and help offset mortgage rate increases for investors)
2. If increased rates result in a significant market correction the RB will drop them again.
Thoughts?
The Reserve Banks mandate is " to create the conditions that promote full employment and maintain the purchasing power of your money into the future". Nothing in there says "Protect the housing market and ensure values are always rising".
I would think if they make a move to reduce inflation (which seems imminent) and then drop the OCR at a later time to protect the housing market with inflation still high and/or rising, that would be a pretty hard sell.
Yep, that's exactly my view and why I think they will go no higher than 1.5-1.75%.
Retail interest rates have risen a lot over the last two months, I think they will be starting to have a dampening effect on the economy and inflation which will be reflected in much lower rate of growth in the CPI at the next announcement, which will give the RBNZ the rationale to pause the hikes.
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