Banks are waiting for mortgage-borrower tipping point, then swap rates will rise fast says Roger J Kerr. Your view?

Banks are waiting for mortgage-borrower tipping point, then swap rates will rise fast says Roger J Kerr. Your view?

 By Roger J Kerr

Focus for the local interest rate market in the short term is firmly on the RBNZ Monetary Policy Statement on 8 December.

It is a very uncertain and difficult international economic environment currently and how much the RBNZ factor these unanswered global questions into their domestic economic outlook is one important aspect of the statement.

They have to build in a much lower global growth outlook and then determine how local households and business firms will behave in relation to the global uncertainty.

Even if Europe falls into economic recession, which is very likely, it is not expected that they will drag the US and Asian economies down.

Therefore, in terms of New Zealand’s export prices and demand the overseas situation is not all negative.

Whatever the offshore and domestic economic prognosis, it appears that our inflation risks have reduced and should remain comfortably between 2.00% and 2.75% annual CPI over the next 12 months.

The Christchurch earthquake rebuild by its sheer size still stands as a real inflation risk later on, even though the timing is continually pushed forward.

The last inflation figures for the September quarter revealed the importance of the NZ dollar exchange rate as a key determinant of pricing behaviour.

The prices of appliances, furniture, clothing, electronic products and computers all fell as retailers passed through the benefits of a NZD/USD exchange rate above 0.8000 in the first half of 2011. If importers have some currency hedging on board, there will not be any price increases from the latest fall in the NZ dollar.

The RBNZ Monetary Policy Statement will include several scenarios for the economy with no real clear message of what they think is the more likely scenario - that is, it will not be much use to anyone.

The money markets are starting to price in a small probability of interest rate cuts in 2012, which appears to have more to do with lower Australian interest rate market forward pricing rather than a fair and accurate assessment of growth and inflation in the NZ economy next year.

That pricing is not expected to last too long.

At some point over the next six months, households in New Zealand with a home mortgage currently on floating rate (about 70% are now on floating) will all simultaneously conclude that interest rates are more likely to rise than fall further and will all fix at once.

When that day comes the banks will hit the swaps market all from one side to off-lay their risk and send swap interest rates sharply upwards. Picking that timing is not easy and will depend on Europe receding as a concern and half decent growth and jobs numbers coming through locally.


* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

I've been following this website for awhile, but only just registered to post comments.  Just wanted to get a few opinions on my situation. 


I've just returned from spending five years in Australia, and have sold my property there, and have cash in the bank here.  Should I look to purchase property in New Zealand now (specifically Auckland - because this is where I'm working)?  Or should I hold onto the cash?


I've seen other comments about expected house price declines in the next few years, and just wanted to see what other people think in this situation?


My thoughts - why I should hold off on purchasing:  the euro is in trouble, and if/when (the latter is more likely) it completely implodes (France's credit rating was downgraded this morning as well), this will probably lead to increased credit costs in NZ, which will depress house prices to an extent.  Also, if Labour win the election this weekend - they will look to implement CGT in NZ on all but the family home - which may depress house prices to some extent as well (or result in increased rents). 


My thoughts - why I should look to purchase now:  construction prices are increasing, NZ population increasing, Auckland population increasing, properties in good areas tend to hold value better than others. 


It's a difficult decision, not sure what path to go down.

You are correct, it is a very difficult decision.....

Right now there is no sign of house prices taking off except in a very few select areas which only show small gains.....the rest of NZ seems to be declining especially when you take inflation at about 2% into account....

Therefore I suppose the first Q is, do I have to buy today?  or can I wait 6months? to see how this pans out.   If so look to protect your capital so it cant be haircut'd if a bank folds....

Im not sure credit costs will be more expensive, right now NZ Govn bonds are being got at lower rates  than before....NZ's soverign debt is seen as fairly safe....banks are seen as being fairly sound....everywhere else looks worse.....but its a crazy world.

So the downside is I see a depression starting within 12months and the biggest one since the Great Depression or even house prices I see as dropping 50 to 75%.....taking 5 or 6 years to do so.

That is a huge risk and impact on your capital....

Others seem to see inflation or even hyper-inflation.....Inflation  will eat your capital a bit if you dont buy.....but not significantly.....Hyper-inflation, I just cant see....

That is a small risk and impact to your capital's value....

So I would see it a an asymmetrical situation.......

Then consider that selling a house into a buyers market is or can be illiquid (hard to do and takes time, costs and price drops take out capital).....buying into a sellers market on the other hand its easy to get into housing but can be hard to get out if you have to.....

So I see no huge reason to buy right now.....



If you can buy well, then buy.  It has always been the case that the money to be made on property is made when purchasing - not when selling.  So, purchase well and you'll be fine.

That said, there is not always an immediate opportunity to purchase well.  Therefore, you really need to think about your money being in a NZ bank.  Deposits in NZ banks are not govt guaranteed and the RBNZ's Open Bank Resolution puts your deposits at (what I would assess to be) extreme risk in today's very volatile international environment.

Move your deposits to Australia while you look for a house here. al

Has anyone used velocity trade to transfer money to Austrailia..???? 

Having very low costs to exchange money would be useful..

Thru normal channels one can lose 2% going out and 2% coming back.   ,,...?????

Cheers  Roelof

Roelof - I've used NZ Forex (  They have an Australian branch too (ozforex).

All you need is a bank account in both currencies which you use to pay them (in whichever currency you're "selling", and have the "bought" currency transferred into).  They have quite advantageous FX rates - they gave me (consistently) 3-4% better rates than the banks do.

Once you set up an account - they give you 2 free trades (no fees).  After that, it was $15/trade.  Banks on either end didn't charge any fees because they were deposits from a same currency bank account.


Thanks James.... 3-4% is huge.. !!!  I shall check them out..

This makes moving money cheap and easy....

Cheers Roelof

Keep holding out buddy...yes you are right, the credit lines for our banks are shaky and if Europe implodes it will increase their cost of credit which will flow into values....but the big kahuna to watch is the supply side of the equation...if you are in Auckland the new council is looking at a massive rezone of land, which will improve affordability....also if you follow closely the Govt's statements on property tax, they are stashing away further property taxes for a rainy day...oh and don't forget the Govt is pumping $300 mill per week to prop up our economy - this can't go on forever..when it stops expect it to be like music being turned off at a party...oh and don't forget China too - it's a basketcase....gee so many reasons why not to buy property!

Thanks to you three for your replies.


Steven - your points make sense, and there is no major difference to me if I purchase now or in six months.  The bigger risk is in purchasing now, although personally I would be surprised if prices fell by those extremes (not saying they won't, but anything in excess of 30% would be a catastrophe for NZ).  *edit* on a slight deviation - would it be worth putting the capital into bonus bonds so the capital can't be haircut if any of the banks fail?


Kate - very valuable points.  Any thoughts on the likelihood that the banks will be allowed to fold though?  Most of the NZ banks are owned/backed by the Australian banks and they're all in quite a strong financial position (I do recognise that if real estate prices crash - then the value of their balance sheets would put them a precarious position...  But I don't believe either the NZ Government (in respect of the NZ businesses) or the Aus Government (in respect of the total entitiy's) would allow them to fail completely.  I also suspect Kiwibank would be relatively safe.  Or am I off target?


Ostrich - levers for NZ's economic growth over the next decade are limited.  If Steven's predictions are correct - then no.  There is no way there will be rising real estate values.  However, it depends on immigration as well.  For instance, if NZ's population starts rising rapidly (even though net migration has been negative in the last report), and New Zealand citizens who are overseas return home with foreign earnings/capital - then it could cause prices to increase.  Otherwise, we'll need a massive food shortage worldwide (which is possible) driving up the value of our exports significantly.  


Thanks again for your replies and assistance - and I hope you can respond to any correct/incorrect assumptions I've made above too.


I dont know about bonus how safe they are. I dont have much $ so its simply in bank deposits.  Probably not a bad idea to have 2 bank accounts totally seperate, say one for you and one for your wife (I assume) in different banks...I assume there is no problem transferring large sums of money via Internet banking overnight if needbe.

>30% housing losses, catestrophic, yes.  The historic ratio of wages to house prices however is 3 to 1 and we are something like 5+ to 1......just by that metric alone I cant accept that there will be only a 30% loss....but then there is little rational out there IMHO.

Banks are only in a strong position as long as housing values hold up...that and farm the milk solids prices at auction...and from that Fonterra's payout projections.....If those drop the mortgage asets the bansk hold on their books become less valuable and technically the bansk are insolvent and/or in breach of ytheir loan to deposit ratios.... If the banks are not allowed to fold then the only way taht can occur is if teh Govn steps in and does an ireland.....I think we can see that ugly outcome....Bollard has his living wills thing....If that gets put in place in time, banks can open the next day and carry on trading, this is essensal if we dont want riots. If that is teh case however depositors take a haircut if I understand correctly.....

For me the most important thing from what I can read is to protect your capital...I think there is a very good reason the "wise" money is buying US Treasuries at yields so low they are negative when you consider inflation.....they think its safe......I also cant see how, if they really are 'wise" they are not worried about inflation or hyper-inflation leaving them in the dust.....for such an almost paranoid action I can but assume we should act in a simialr way.




We parked a nice sum in BBonds once for a bit of fun and as a 'protest' against lower interest rates on TDs that were coming off an 8.5% rate (those were the days, eh!).  Averaged a 6.3% return in winnings, so it was worthwhile (and winnings were not taxed), but maybe we were just lucky.

Point is - ANZ bank ran the scheme at that stage and if I recall correctly - when the Govt announced the government guarantee post Lehman it didn't cover BBonds and so we put the money back on TD.

Now the Govt doesn't GG the banks (in fact, quite the opposite under the OBR!) - so I doubt BBonds would escape any haircut - they are bonds after all and bondholders as well as depositors are the ones who will be expected to pay in NZ under this new rule.

And I don't think it will necessarily take a property market crash per se to "do in" our banks - they all have to go back out into the market to borrow and it's all a matter of timing and whether there is anyone willing (or able!!!!) to lend.

But IMHO, the ideal is not to have all your eggs in a depositors basket at the present time.  Buy some hard assets - but use commonsense - if buying accommodation for yourself limit, limit, limit your borrowing.



Suggestion- buy gold, and soon enjoy the explosion in value against devalued currencies. 

All "money" is based on faith.  What happens to the value of said "money" when the faith is gone? 

See what's happening with MF Global?  It's the canary in the coal mine. 

In Re: "Even if Europe falls into economic recession, which is very likely, it is not expected that they will drag the US and Asian economies down."


What a laugh....  I'm still laughing


In Re: "Even if Europe falls into economic recession, which is very likely, it is not expected that they will drag the US and Asian economies down."


What a laugh....  I'm still laughing


Predicting the future is a very difficult game....

I think Kates' advice is good...  If u can buy well and don't have to borrow too much... then buying is a good idea.

After all.... first and foremost a home is a place to live..

My own personal view is that the Central Banks around the world will step in and provide whatever liquidity is required for whatever crisis..  Thats' what they have been doing...and I think they'll continue.

The deflationary shocks will happen ...but Central Banks will provide liquidity...even in the face of inflationary pressures.....  and there are inflationary pressures. there are signs of supply side inflation....  and monetary aggregates are starting to move again.

Throw on top of that the Social Welfare system and how it acts as a safety net against a deflationary spiral.


  I really can't see home prices dropping markedly...  That would be a low probability senario in my opinion.

BUT.... it is only my opinion and best guess.

Cheers  Roelof


Core inflation is stuck in the 2% sorry but I cant see signs of inflationary pressures....if anything dis-inflation....

CB's providing liquidity, I dont think they can because they dont have the scale to do so....and there isnt the ability to pay it back.....

Supply side inflation is deflationary in other areas....if goods A goes up 5% goods B has to drop 5% if the buyer has no more moeny.....and this is the case.....those supplying goods B therefore will have to drop prices or not sell and go out of business......being on the dole is deflationary.....

You dont have to own a home for a place to live....and saddling yourself with a lifetime of debt and a rsik of bankruptcy is no sane way to live IMHO.


Power point presentation by one of my favorite economists...Peter Warburton

Scroll down to page 3 to see a chart of real interest rates around the world.

A good question is....  When will people shift from Savings into another asset class..????

How long will people tolerate -ve  returns..?????  



on the other hand how will ppl gauge the risk of losing a lot of money?  A small -ve return for a high level of safety against a very high risk of substantial loss is not a bad way to go.  If the risk are very high....and I think they  the "Greenspan put" has taken borrowing to an impossible low, causing bubbles everywhere......I dont think there is anywhere safe to put money right now....


Thanks, read it....pages of inflation and how to protect against it etc....virtually nothing of deflation....or how to protect against it.....he doesnt appear to see that as a risk from what I can read.....

One interesting comment is food and energy respond weakly to incentives oh could that be be because we are at max production I wonder.........yet its seems almsot he's ignoring it, especially when later he thinks the effects of energy will be temporary......yet I cant see why he thanks that.......

I suspect some assumptions that might unravel his position and he wont expect it.



This guy is very...very good.. He wrote an "underground classic" called Debt and Delusion .

Keep in mind that the power point was about  the question of inflation.

u may have mis- read what he said...  The title of that  "plate" was " FALSE hopes and painful discoveries"... ..He is actually saying that the impact of energy WILL NOT be tempory... (The first 4 points are false hopes and the next 4 are painful discoveries.)

I tend to agree with him..... in regards to inflationary pressures.. 

BUT... I do balance his views with the views of Gary Shilling ... and others.

So..I guess I'm in the inflation camp... and think we will squeeze one more cycle ...before the "endgame"......  maybe.



Sorry I cant agree on even good let alone "very very" he writes to support inflation....but I dont think he's analysing the total situation, he's merely looking for reasons to support his position on inflation which he sees IMHO.

Hmm not so clear on oil, for instance he has a slide on key risks oil /energy isnt on it....arguably is a bit longer term than the key ones as they are all short term or almost immediate issues.

"False hopes" slide.....maybe its the way he's written it....but for me its misleading/confusing

Not sure what you mean by more cycle of inflation?  what we saw for 3 years was commodity speculation from low interest rates...which seems to be exiting "naturally"


Having been on a higher mortgage rate for the last year, I'm coming up to my fixed rate finishing in a month. I'm on 6.15% at the moment and will go down to 5.65%.

Should I refix for another year at the lower rate or should I wait and see what happens? When / if do you think the rates will increase?



Fix - who would want to tempt fate in this day and age for a few basis points? 

That's what all those folks were doing when millions were lost to the finance companies - chasing what ... another 2-3% over and above what you could get from a bank - madness.

But, I always fear the worst and play safe.


Kiwibank are doing 4.99% for 6 months if your LVR is 30% or better...otherwise it depends on the margin....Im perfectly happy on floating.....its how secure you feel and paying to feel a bit more secure....


Do you think rates will come down anymore, or only remain the same or increase?