Roger J Kerr says because mortgage holders aren't fixing long, OCR increases this year and next will bite the retail and housing sectors earlier and harder

 By Roger J Kerr

The next six months, up until the general election in September, in both the housing and retail sectors in the NZ economy is going to be a very interesting period to observe.

Interest rate increases for mortgage borrowers after five years of very low and stable borrowing rates are going to have an adverse impact on consumer confidence, spending and the residential property market sentiment.

Just how far discretionary spending is pulled back by households with mortgages remains to be seen.

While the current and future interest rate increases have been very well signaled and signposted in advance by everyone from Graeme Wheeler to Mike Pero, the gut feeling is that the vast majority of home mortgage borrowers have not adjusted their spending habits to the new interest rate reality.

The closing of wallets may well be more pronounced than what most expect.

The counter-argument is that there is super confidence in job security and thus the ability to leverage the boss for a larger pay increase to meet the monthly mortgage payments.

Depending on the industry sector, I would not be so sure about that.

Anecdotal reports from the banks is that more and more mortgage borrowers are now fixing, however there is no apparent mad rush that in the past would have pushed two-year swap rates up in the wholesale interest rate swap market.

Many borrowers will be examining the 0.50% gap between variable mortgage rates now at 6.00% and two-year fixed rates at 6.50% and deciding to stay at the lower variable rates for a few more months yet.

How much the two-year swap rates increase following the April and June OCR increases will be interesting, my bet is no more than 0.25% higher to 4.25% and thus the two-year mortgage borrowing rate will be 6.75% by June/July.

Looking further ahead, on the assumption the economy and currency are in line with RBNZ forecasts and assumption over the next 18-24 months, successive OCR increases to 5% will have variable mortgage rates at 8% by the end of 2015.

Therefore, borrowing four years fixed today at 7%-7.2% is comparable to the likely average variable mortgage rate over the next two years of 7.2%, plus there is the advantage of being fixed at 7% against variable rates of 8% over the last two years of the fixing.

Thus, sensible and logical economics to fix for four years, right?

So the banks must be inundated with demand to fix for this term?

I doubt that they are.

Many borrowers cannot afford 7% today and most just borrow at the lowest available interest rate and have no view of the future risk.

The low level of mortgage fixing on this cycle means that the OCR increases this year and next will bite the retail and housing sectors earlier and harder than what most imagine.

Businesses dependent upon the retail and housing sectors need to be aware of this risk that most economic/market commentators appear to be underestimating.

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Roger J Kerr is a partner at PwC. 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 rogeradvice.com

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12 Comments

Maybe some in the mortgagebelt are still recovering from being stung by 'break fees' of $20,000 or so in 2009/2010.
Once you fix you are at the mercy of the bank.
While EU & the world considers deflation, we are supposed to worry about floating rates of 12%?!
What else can we insure against?

Think most are tired of manipulation by banks and rbnz & govt and happy to float , short fix & see what happens.

Maybe some in the mortgagebelt are still recovering from being stung by 'break fees' of $20,000 or so in 2009/2010.
Once you fix you are at the mercy of the bank.
While EU & the world considers deflation, we are supposed to worry about floating rates of 12%?!
What else can we insure against?

Think most are tired of manipulation by banks and rbnz & govt and happy to float , short fix & see what happens.

Households have reduced their spending since 2008. Our 'recovery' has never included wages or consumer spending.

Wheeler has been indoctrinated in Globalization. This philosophy holds no loyalty to an individual Country - their aim is to break down every national barrier. If raising rates impoverishes ordinary kiwis, so be it.

John Key is a Believer in Globalisation as well of course. They aim to 'corporatise' every organization. So the financial 'discipline' can be applied to every organization and individual. Schools & Unis etc wont be exempt.
Read history: nazism, communism, totalitarianism etc - to break privacy, dignity & freedom.

Globalization will only ever work with a one world government, whose system are you prepared to put money on being the one that rises to the top.
I will state right now that the larger the area or population you are trying to govern, the more totalitarian you have to become to do it.
 

sounds like a wonderful future,hope we get some 'freedom'
http://www.stuff.co.nz/world/americas/9892275/Venezuelas-plan-to-keep-shelves-stocked

What impact does a higher ocr (esp when compared to other countries, even AU), have on flow of money into NZ?  And how does this effect how keen banks are to lend more money?  And how does this effect margins and lead to more competitive mortgage rates?
There used to be a great graph on the rbnz website showing a very strong correlation between the nzd and nz house prices.  If the nzd heads higher, and more money flows in nzd's, then where is it going to go?
 

"Do not get mad, get even".
I hear they are going after the entire Kleptos, hence why they exported themselves to safe havens, for blue-collar crimes, like #NZ.
One rule for one, one rule for another.
Do you take VISA, maybe DINERS?.
Remember, it is not what you know, it is who.
Personally, I cannot ever remember.
Surely a sign of a obfuscation, or dementia, so I am told, repeatedly.
http://www.zerohedge.com/contributed/2014-03-31/pitchforks-come-out-chin...

I wonder if the masses are avoiding fixing long term, because they just don't believe that the OCR will go that high....
perhaps they think that globally things aren't that certain,
Perhaps they can't see why we would push our exchange rate higher
I'm no economist, but even i can see that NZ can act like its in a vacum, what plays in the real world will greatly impact what happens here

Yep

Your view seems to be that rates will continue to climb as all will be well in NZ while the rest of the world is at best in the doldrums.  My view is we are sailing in the eye of the biggest storm since the Great Depression and we'll exit that eye at some point.
Hence sure we'll see some OCR rises for now...the Q is just how long for. My view is that oil is still at $100 ish and staying there, for now.  Just what happens when we fall off the production plateau has to be seen to be believed IMHO.  I think we'll see price spikes, shoratges and a huge negative effect on our economy, bye bye OCR rises.
regards