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Bernard Hickey looks at how to think about whether to fix or float, how long to fix and what the Reserve Bank may do about house prices

Bernard Hickey looks at how to think about whether to fix or float, how long to fix and what the Reserve Bank may do about house prices
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By Bernard Hickey

We live in strange world at the moment where economic growth is strong, inflation is very low, interest rates have been surprisingly low for a surprisingly long period and all this strangeness could carry on well into next year.

The New Zealand economy is cantering into winter with plenty of momentum, but it is the Auckland housing market that is galloping the fastest.

Barfoot and Thompson reported handling a record NZ$1.24 billion worth of sales in the 31 days of March, which would have generated more than NZ$1 million of commissions each day for the agency and its agents in Auckland.

The average house price across the Auckland region hit a record high NZ$776,729 and the 1,597 properties sold by Barfoot and Thompson in March was a record high and up 15% from a year ago.

Prices in Auckland are rising at double-digit rates on an annualized basis and there is little on the immediate horizon to suggest any slowdown. Net migration is at record highs, longer term fixed mortgage rates are still edging lower and employment and income growth continues to rollick along at over 3%.

Also, less than 8,000 housing consents were granted in Auckland in the last 12 months, which is below the 13,000 seen necessary to keep up with record net migration into Auckland, which is running at over 25,000 annually. The Government has estimated the shortage in Auckland is likely to be around 25,000 dwellings by the end of this year.

However, it's not all one-way traffic in Auckland's housing market.

The Reserve Bank of New Zealand is preparing to force banks to put aside more capital to back loans to rental property investors. That could force banks to charge higher interest rates to landlords than to owner-occupiers, although the jury is out on that because the banks will control how their extra costs are spread across their customers – not the Reserve Bank.  They could choose to subsidise landlords by charging higher interest rates for business and other borrowers, just as they subsidise fixed rate lending by overcharging for floating rate lending.

This new capital rule could apply from as early as July 1. Those hoping for a relaxation of the Reserve Bank's other 'Macro-Prudential' tool – the high LVR speed limit – will also have to wait for a lot longer. Most think it will stay in place for the forseeable future.

One thing borrowers won't have to worry too much about though over the next couple of years is rising interest rates, at least according to the Reserve Bank's own forecasts for short term interest rates. It expects them not to change until at least the first quarter of 2017.

And the rest of the country?

Economic and housing market life outside of Auckland isn't quite so rosy. House price inflation in most places south and north of Auckland is running in low single digit territory, with some of the smaller provincial cities flat to lower.

Hopes that dairy prices would rebound were dashed in early April after two of the worst auctions in years. Demand from China has yet to recover and European dairy farmers were allowed to export their socks off from April 1 because of the end of export quotas. Russia's ban on European cheese imports has also freed up a lot of European milk to be dried into milk powder and exported into markets previously dominated by New Zealand.

Forestry-reliant regions such as Northland, the East Coast and Nelson/Marlborough are is also struggling because of a slow-down in construction sector in China, given many of New Zealand's logs are sawn up into boxing for setting concrete. This slowdown in China is also hitting Australia because iron ore prices have slumped to 10-year lows. The irony is that this Australian weakness is one of the factors driving the New Zealand dollar to almost parity with the Aussie dollar. That is great for households in the big cities planning shopping trips and winter holidays in Australia, but is tough for the regions and manufacturers.

The other irony of this strong New Zealand dollar -- it is also at record highs vs the euro -- helps drive down imported prices, which increases the chances the Reserve Bank may have to cut its Official Cash Rate (OCR). Governor Graeme Wheeler has also said he won't take Auckland's housing boom into account when making his OCR decisions, given he wants to use his other 'Macro-Prudential' tools to do that. So Auckland's hot market wouldn't stop a rate cut.

So how does this fit into the decision fix or float?

My view for several years has been that interest rates stay lower and for longer than most economists have forecast. They may even fall.

That makes me more likely to fix for a shorter than a longer term. The banks subsidise fixed rates at the expense of higher floating rates, so even though floating should make more sense if rates were to fall, the cheapest most flexible option is a shorter fixed mortgage. The idea of a 10 year fixed mortgage scares me witless.

That rate of 5.89% might look good now, but what if the long term average for mortgage rates is in the process of a structural fall to more like 4-5% instead of the 7.4% we've seen over the last decade? Imagine the break fees on a 10 year mortgage.

Could they go lower?

The slump in fixed mortgage rates has made it much more difficult to justify paying the 6.74% offered by most banks for floating rate mortgages. The question then is: how long to fix?

The answer to that question depends on your view on where inflation in New Zealand and locally is going, and what you think central banks will do about it.

The jury is in overseas. They are treating this very low inflation and deflation as a cyclical issue that needs to be addressed with even lower interest rates and money printing. The People's Bank of China has also eased monetary policy in recent weeks, as has the Reserve Bank of Australia. The Reserve Bank of New Zealand is an outlier and despite the strong growth is seen unlikely to hike interest rates again for the forseeable future -- at least until early 2017.  So far in 2015, Reuters reports 17 central banks have eased monetary policy.

So the global trend over the last six months has been for interest rates to fall ever lower. It's not just about falling petrol prices. There is now a growing debate about whether the deflation is structural and linked to changing technology, the globalisation of services and ageing populations. For now, central banks think it's cyclical. The wisdom of crowds in financial markets, particularly bond markets and stock markets, suggest it might be structural.

Structural or cyclical?

If it is structural then interest rates could remain low and possibly fall even further. Remember that interest rates averaged around 3% for all of the 1800s during the first age of industrialisation as new machines lowered the cost of production.

Some argue the world is entering a second age of industrialisation that delivers a similar type of 'supply shock' that lowers prices of goods and services for decades to come. The age of the smart phone has clearly driven down prices for many services, including shopping, accounting, music, telecommunications and taxis. Could we see many other areas such as education, health and financial services similarly transformed in a deflationary way?

Calculating the gains

There is a way to work out which mortgage and which rate saves you the most money, relative to floating rates. has built a special fixed vs floating calculator. See the table below for the latest calculations on a NZ$500,000 mortgage.

Here's a table that shows the benefits of moving a NZ$500,000 mortgage of moving from a floating rate of 6.75% to the various fixed options, assuming different interest rate tracks. The gains are indicated as a positive and the losses are negative. The middle track for the OCR is in line with market expectations. See all mortgage rates here.

The latest estimates, given the drop in fixed rates in recent months, suggest fixing is cheaper than floating across the board.

OCR rate by mid 2016 One year fixed (5.5%) Two year fixed (5.15%)
OCR at 4.0% (low) + NZ$6,068 + NZ$11,531
OCR at 5.0% (middle) + NZ$9,017 + NZ$14,480
OCR at 5.8% (high) + NZ$12,253 + NZ$17,716

Mortgage rates

Select chart tabs

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What if OCR sits around 2.5-3.5%?


"They could choose to subsidise landlords by charging higher interest rates for business and other borrowers, just as they subsidise fixed rate lending by overcharging for floating rate lending"

Or worse....... is another option whereby they could choose not to increase mortgage rates at all for anyone, just decrease term deposit rates. Have a bigger margin.

Wouldn't put it past them....


My opinion :- DO NOT FIX

I reckon the cost of money will fall further , and we are too open an economy to be insulated from this .

Now that the Euro is being printed in large quantitites , who know how much its going to affect us

The GFC horror story is simply not yet over, like a Genie in a bottle,  the unintended consequences of QE  are still manifesting themselves and when Greece pops there are  going to be some unplesant surprises .

 QE merely bought some time for the Banks and Bondholders to  write down assets and provide for bad debts .

Its not over yet .



Actually fixing for 6 months would seem the plan.



Just fixed for 5 years at 4.99%. Last time I fixed was at 9.5% for 2 years and yes - I got burnt. However, with a baby on the way, and dropping down to one income - it felt like a good rate which would give some stability for a number of years


Which bank?


... you can see men coming away very happy from  the Auckland Sperm Bank  ... ... ASB ?




DO NOT FIX just in case you need to get out quickly


If you have high certainity it will be a long term hold - say 3-5 years why not fixed at around high 4s, the upside is not that great...this discussion does not consider a credit shock, just a little collusion in the finance markets could easily create..based on fact, a sick real sector which is coming real soon or fiction...


It feels pleasure to be the owner of a property but everything link with the bank is too difficult to figure out. Bernard Hickey, I really loved to read this content and I completely agree with all the points mentioned here. However, it is about house prices, they will keep hiking day by day and there is no doubt with it and also it is very much tough to find a house of your own choice easily. Well written Bernard. Apartment Property Management Greensboro, NC.