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RBNZ happy with short-term borrowers, expects Kiwis to stay more short-term like Aussies meaning less need for OCR hikes

RBNZ happy with short-term borrowers, expects Kiwis to stay more short-term like Aussies meaning less need for OCR hikes
More mortgages are now floating rather than fixed.

By Alex Tarrant

The Reserve Bank says New Zealand mortgage borrowers are unlikely to jump into fixed rates from floating in any big hurry when it starts to push up the Official Cash Rate, with borrowers becoming more like their Australian counterparts, opting more for short-term mortgages than fixing long.

New Zealand's central bank left the OCR on hold at a record low of 2.5% today, and signalled modest and gradual increases over the next two years, which economists are picking to mean a peak of 4.5% to 5% for the OCR in its current cycle. See Bernard Hickey's article with more detail on the RBNZ's OCR announcement here.

Reserve Bank Governor Alan Bollard told a news conference when releasing the bank June Quarter Monetary Policy Statement (MPS) the majority of borrowers were on floating rates, or terms six months and less. This meant the RBNZ would have more effect when it did raise the Official Cash Rate, and that it would not have to raise the OCR as much as if more long people were on long term rates.

“New Zealanders, when they’re borrowing for mortgages, are now down to less than six months duration on average. That means that most are pretty much near floating rates, and that means if and when we do need to increase rates, we can expect to have a pretty quick effect," Bollard said at a media conference after releasing the RBNZ's June Quarter Monetary Policy Statement.

“So we think we can be quite patient whilst still watching to test that assumption [that consumer spending increases will be subdued],” he said.

The latest figures released by the Reserve Bank show 80.74% of the country's total NZ$168.001 billion worth of home loans were either floating or fixed for a term of less than one year in April. This figure, which excludes NZ$501 million of unallocated mortgages, is a record high percentage since the central bank's series on floating and fixed-term home loans began in June 1998 ahead of 79.85% reached in March.

The percentage of all residential mortgages on floating, or variable, terms has also extended its record high, reaching 52.62% after popping up above 50% for the first time in March.

See more in Gareth Vaughan's article here.

“At some stage more New Zealanders may look for fixed rates, but there’s no sign of that at the minute. Given the yield curve, we don’t expect that necessarily to happen in a big hurry. I suspect we’ll see New Zealand borrowers looking a little bit more like Australian borrowers, probably more short [term] for some time," Bollard said.

The Reserve Bank thought New Zealand borrowers were now more sensitive to rate increases.

"That’s another reason why our outward track for 90 day rates is consistent with not expecting the Official Cash Rate to have to go too high in this cycle," Bollard said.

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15 Comments

Yeah right! That's what they are hoping.  Once rates take off, mortgage holders will flock to fixed mortgages.

 

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The move to floating rates isn't good. There is now a potential for an interest rate shock. There could come a time (possibly soon) when world interest rates rise sharply, and the RBNZ has no choice but to raise the OCR, also sharply. This would immediately cause a lot of problems for all those floating rate homeowners.

Far better surely would be if they encouraged lenders and borrowers to use 25-year fixes for 25 year mortgages, rather than limiting to at most a 5 year fix. That way the borrower is never exposed to an interest rate shock, so such loans would be much safer from the RBNZ point of view.

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Don't know about you, james, but I'm not about to put my cash on TD for 25 years! You need a very deep capital market to have those long term rates - large pension flows etc, and we don't.

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Agreed that TD's wouldn't fund such mortgages. But is the fact that we don't more to do with the fact that the banks don't want to, rather than a technical limit because of the size of NZ markets. Surely there are long term domestic and overseas institutional investors?

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I doubt it, james. Anyone with a risk profile that long is probably an overseas entity. They can make their return 5 times over, for 5 years each during that 25 years. Tying up credit lines for that long needs a hefty premium over a shorter run.

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Some KiwiSaver funds should be interested. And even if it does need to be overseas investors, how is that different from what we have now?

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Guys, I think long-term mortgages in NZ are possible but to do so would mean we replicate the US model, which has some big differences. In the US, the mortgage market is largely securitised, which means they aren't funded by TDs or banks at all. They get funded by the issuance of Mortgage-Backed Securities (MBS), which own a pool of mortgages. In the US you can break and refinance your mortgage at low cost (even though they are mainly fixed rate). In NZ we have had MBS for over 10 years and the better quality ones have performed well. The NZ pools have been made up of a mix of fixed and floating mortgages. NZ insitutions have been the buyers of these securities. During the GFC, some did not trade well, as they had a sub-prime element to them as the mortgages weren't originated by banks, but by other firms that had to target borrowers who might not readily meet bank lending criteria. That sounds risky, but an example might be a self-employed electrician who has no PAYE slip as evidence of income.

 

 

 

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In the US I think MBS are only a recent thing, before that you could get a 25year fixed term mortgage....and I think it was quite normal? MBS is just a way for the bank to offload its capital limitation onto someone else and keep lending, just acting as the middle man for two parties and taking a cut...and then of course we get the fraud which from what I can see the US banks are knee deep in....if not eyeball deep.

So I would think its quite possible here except its simply not offered...why not I dont know...

regards

 

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"Floating"............or sinking!

Watch now as post the election when BE gives AB the OK ...the floaters discover how deep the ocean is and how useless their lifejackets are...

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Wolly: I disagree. Do the numbers and you will find that it is normally cheaper to stay floating. Sure at times you pay high rates but normally not for long and at least you are only ever paying the current market rate. The secret of course is to reduce the debt as fast as you can, but most don't.

Those that have been locked in over the past 4 -5 years have certainly suffered but I have learnt that has normally been the case. Best to stay floating and reduce debt as fast as you can.

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What is another term for "...reduce debt as fast as you can", Gavin? Deflation, sir, deflation. And that's coming to all debt financed assets near you, as everyone 'pays down their debts' and stops buying anything but necessities. The New Normal, Gavin, to use a well over-usued expression.

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The "Great Austerity"

regards

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The last few years have been highly unusual, historically you have to go back to the GD to find a similar precident and that's outside of most living (and not OAPs) ppls direct experience...

However increased instability and volitility was predicted as part of peak oil....

"reduce debt as fast as you can", indeed in a depression / deflation event this is key...and thats what we face and why Wolly is wrong....

regards

 

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I fail to see why they have to control inflation by raising the OCR and thus interest rates which naturally affects everyone that has borrowings. This puts a lot of strain on families that have no control over these rising rates.

Obviously they do need a mechanism to control inflation, but to me it would be far less damaging if they just did so by increasing the deposit ratio required for any new borrowings.

When the banks want to slow down home lending the most effect way is to increase the deposit required from 5% to 20% etc. This could also apply to all hire purchases etc.

This would surely effectively take the heat out of any rising economy without adversely affecting those with exciting borrowings. If they needed to borrow more they also would have to meet the increased deposit requirements.

But then they couldn’t possibly do this as it would be far too simple and half the pen pushes and bureaucrats would lose their jobs!

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Do you think there was strain on families, like we have today, back in 2007 when mortgage rates were 5% higher, Gavin? I don't! Because the house-as-an-ATM environment existed ; they were litereally 'eating their home' back then - the interest rate level rate didn't matter. It's not 'interest rates' that put strain on households, but debt. It really doesn't matter what the rate is once it's unsustainable; once people can't add to the mortgage debt to 'eat' ( hence why we seem to be 'straining' at mortgage rates half of what they were!). The core debt that New Zealanders have is going to have to be retired. That's going to mean selling excess housing; unafforadable ( at the family level) housing and larger sized housing ( the family will fit the home rather than the amount of the borrowing capacity). It's all downhill from here for property... no matter what interest rate levels are. Now, you may see why I expected, and still do, the OCR to go to 0%?

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