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|
|margin to swap||+3.93||+2.51||+2.42||+2.59||+3.14||+3.08|
|CBA (ASB's parent)||5.22||4.14||4.14||4.14||4.34||4.34|
|NAB (BNZ's parent)||5.24||3.99||3.98||4.04||4.69||4.69|
|margin to swap||+3.28||+2.21||+2.08||+2.03||+2.05||+1.98|
|* 90 day bank bill rate|
|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.