We look at how New Zealand mortgage pricing compares with what Aussies pay for the same sort of loans. We find that competition is not working to get Kiwi's a better deal. The banks are getting the better deal in 2017

2017 has been a year where interest rates have just moved sideways for mortgage borrowers.

Floating rates moved up in March 2017 but fixed rates have been little changed for terms of three years and shorter, although they have firmed for longer terms.

Meanwhile, wholesale swap rates have been falling.

The real story in New Zealand is the growth in the margins to swap. They have increased substantially.

For floating rates they are up +32 bps, one year fixed rates are up +25 bps two and three year fixed mortgage rates are up +14 bps, four and year rates are up +42 bps.

In any bank treasurer's language, these are fat margin increases.

But the real story comes when you compare with rates in Australia.

Margins to swap have actually decreased in Australia.

And that means the differential between New Zealand and Australia has widened during 2017.

In fact, it is at three year highs for the long end (fixed 4 and 5 year rates), and well over two year highs for all other terms.

This is one key reason the Kiwi arms of the Aussie banking giants regularly outperform their parents, and the BIS shows we are among the most protitable banking markets of all developed countries

In New Zealand there are about nine or ten active banks seeking mortgage business, but 96% of all business is being done by just five of them. And one of them, Kiwibank, struggles to post competitive profit results. The market share of the four Aussie-owned banks makes them unassailable.

There are far more options in Australia with well over 25 institutions with a home loan book over AU$1 bln, and the four majors with 'only' an 83% market share. But the sheer scale means that 17% not with the four pillar banks is a market of $261 bln, itself larger than the whole New Zealand home loan market.

We pay about +0.50% for being in a smaller market (the extra margin to swap), and up to another +1% for being in a less competitive market.

Here is the current comparison:

Residential mortgage interest rates
November 13, 2017 Floating 1 year 2 years 3 years 4 years 5 years
New Zealand % % % % % %
   ANZ 5.79 4.55 4.69 4.99 5.89 6.09
   ASB 5.80 4.39 4.69 4.99 5.49 5.69
   BNZ 5.90 4.99 4.79 5.09 5.89 6.09
   HSBC 5.99 4.19 4.29 4.89 5.29 5.59
   Kiwibank 5.80 4.55 4.65 4.99 5.75 5.69
   Westpac 5.95 4.59 4.69 4.94 5.89 5.59
NZ average 5.87 4.54 4.63 4.98 5.70 5.79
   Swap rates 1.94* 2.03 2.21 2.39 2.56 2.71
   margin to swap +3.93 +2.51 +2.42 +2.59 +3.14 +3.08
             
Australia            
   ANZ 5.20 4.14 4.03 4.14 4.54 4.64
   CBA (ASB's parent) 5.22 4.14 4.14 4.14 4.34 4.34
   HSBC 5.23 3.8 3.85 4.05 4.25 4.35
   NAB (BNZ's parent) 5.24 3.99 3.98 4.04 4.69 4.69
   Suncorp 3.79 3.69 3.89 3.89 3.99 3.99
   Westpac 5.24 4.19 4.08 4.19 4.39 4.39
AU average 4.99 3.99 4.00 4.08 4.37 4.40
   Swap rates 1.71* 1.78 1.92 2.05 2.32 2.42
   margin to swap +3.28 +2.21 +2.08 +2.03 +2.05 +1.98
   * 90 day bank bill rate            
             
differential (NZ-AU) +0.89 +0.55 +0.64 +0.90 +1.33 +1.39
differential in Jan-17 +0.28 +0.13 +0.59 +0.86 +0.89 +0.94

These are the carded rate differentials - negotiation can lower your actual rates, and your effective costs will be affected by incentives and fees. (Home loan fees are more pervasive in Australia, so much so that they require banks to declare "comparison rates". The above table does not account for those costs.)

We did a similar comparison in January 2017.

In the time since we last explored these comparatives, margins to swap have moved against New Zealand borrowers.

  Floating 1 year 2 years 3 years 4 years 5 years
  % % % % % %
NZ margin to swap +3.93 +2.51 +2.42 +2.59 +3.14 +3.08
AU margin to swap +3.28 +2.21 +2.08 +2.03 +2.05 +1.98
             
Nov-17 differential (NZ-AU) +0.89 +0.55 +0.64 +0.90 +1.33 +1.39
Jan-17 differential (NZ-AU) +0.28 +0.13 +0.59 +0.86 +0.89 +0.94
Aug-15 differential (NZ-AU) +0.69 +0.26 +0.16 +0.56 +0.78 +0.83
Feb-15 differential (NZ-AU) +1.02 +1.06 +0.92 +1.00 +1.01 +1.11

By every measure, New Zealand banks are winning bigger margins-to-swap, and mortgage rate pricing has risen in New Zealand relative to Australia. Our banks are competing to report higher profits, not competing to win customers, secure in the knowledge that they can hold borrowers volumes at these higher margins.

With the change of Government, it is now probably more likely that either the Commerce Commission, or even Parliament itself, may investigate this dominance.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

Floating rates from the minor players in Australia seem to be even cheaper at 3 - 4%.
http://www.ratecity.com.au/home-loans/variable-rate?h_flexibilityScore=3...

Perhaps the NZ branches are charged with the aim of herding more borrowers into fixed rate hence the high NZ floating rate?

David - if this is intended as a serious study on the subject I would have thought that you would strongly prefaced your comments with one that actually informed the uninformed that the margin over swap isn't all the bank margin, in fact the majority of it isn't. If I was you I'd go back and incorporate bank funding costs into the article so that this fact is made clear to all - yes do some analysis on how much that may have moved over the period you want to look at, and how much or otherwise the banks may or may not have passed it on, but to infer what you have by not even mentioning what is a major issue for the banking system, is not up to your normal high standards.

Could you explain how materially different funding costs would or would not be for NZ outposts of Australian banks (I have no idea where to begin looking, or how to compare it to their costs in Australia, if different).

Have successive governments tolerated the banking oligopoly in exchange for a healthy annual tax
contribution ? Will this government be any different ?

What have they had to tolerate Westie ? Please explain

2015 during Question Time. Finance Minister Bill English said.
"Where profits are legally made by overseas banks, then we don't take specific action to take their profits off them, other than to tax them." "Reserve Bank data shows the banks paid almost $2 billion in income tax in the year to June, 2015"
I.E The profit levels of the banks which are in effect a tax on all New Zealanders are tolerable. As long as we get our share.

Jamesy - Off hand I don't know what the exact different would be between what ANZ NZ and its Australian parent can fund at. I could find that out, but their NZ subsidiary certainly wouldn't be getting it cheaper. There is a very good graph in the RBNZ's latest Monetary Policy Statement that highlights the funding spread that the banks have to pay over OCR, and in that graph it's around about 100bps. My understanding is that overall banks funding costs are in the 120-140bps region (compared with about 10-20bps before the GFC) which suggests that the longer-term funding (i.e. above swaps) is somewhat more expensive again than over OCR which makes sense.

My point is that this cost is not recognised at all in David's article and will mislead many into thinking that its part of the bank's margin..

Shouldn't you also analyse deposit rates? ANZ AU TD rate 6m = 1.7%. ANZ NZ TD rate 6m = 3.30%.

It is ultra misleading David to highlight just one side of the balance sheet. NZ banks source majority of funding from depositors, as required by RBNZ.

It is ultra misleading David to highlight just one side of the balance sheet. NZ banks source majority of funding from depositors, as required by RBNZ.

That depends what you mean by "source majority of funding from depositors". It doesn't mean that banks retains a dollar for every dollar lent, as most people assume they do.

I never said that. However, if you refer to RBNZ liquidity rules and the GDS for each bank, it's somewhere in the high 70% range.

The fact is, it's material in any consideration on margins. Must look at margins on both sides of book and not cherry pick lending. It's misleading.

It would be like comparing the price of a Big Mac without relating it back to wages and cost of ingredients.

I never said that. However, if you refer to RBNZ liquidity rules and the GDS for each bank, it's somewhere in the high 70% range.

Also deceptive. Are you saying that each dollar lent by banks for mortgage lending is backed by 70% of "private savings" earned by income, wages, revenue and profit? That kind of belief might be accepted at the neighborhood BBQ.

I think you need to do some research. Refer to RBNZ S-31 & s-40 reporting.

As at Sept 30, $163b in Household deposits, with $238b in Residential lending = 68%.

Maybe my neighbourhood is better read than yours?

David hadnt done a misleading Bank hating article for a while.. i was thinking he might have finally dropped the biased line of argument. Agreed with Grant A here.. there may well be a case that the banks are overcharging us.. but this article certainly doesnt make it. Comparing margin over swap is ridiculous, when there is different captial and regulatory controls which will influence equity/funding requirements. There as just been a raft of annual reports just released by the banks which detail their net interest margins across their books. This is a much better measure of what a bank is "taking" from borrowers and lenders alike.

Be nice to see the correct NZ flag...