Today (Monday) we have had some unprecedented rises in key swap rates. They have been driven by an unexpectedly large rise in the CPI.
The one year wholesale swap rate rose +23 basis points. The two year wholesale swap rate rose +28 bps.
These are the largest one-day rises since we started tracking wholesale swap rates in 2007.
The one year rate is suddenly back to levels last seen in June 2019. The two year rate is now back to levels last seen in January 2019.
If they hold, these huge jumps will have major implications for fixed mortgage rates.
What they indicate is that the money markets have priced in an extra full +25 bps rise at the next RBNZ OCR review on Wednesday, November 24, 2021. This is on top of what they had priced in for the expected strong CPI rise.
And these rises come at the same time international benchmark rates are rising too.
The future is one of sharply higher costs of money. And that means sharply higher mortgage rates.
To give an indication of what might be on the cards, here is what one year fixed home loan rates were when wholesale rates were last at this level:
| Jun-2019 | Oct-2021 | difference | |
| 1 year fixed mortgage rates when swap rates were last at 1.46% | |||
| % | % | bps | |
| ANZ | 3.89 | 2.79 | 110 |
| ASB | 3.95 | 2.99 | 96 |
| BNZ | 3.89 | 2.99 | 90 |
| Kiwibank | 3.85 | 2.95 | 90 |
| Westpac | 3.89 | 2.99 | 90 |
One year fixed rates could conceivably rise almost a full +1.00% in the next few weeks.
And here is what they were for two year fixed home loan rates:
| Jan-2019 | Oct-2021 | difference | |
| 2 year fixed mortgage rates when swap rates were last at 1.93% | |||
| % | % | bps | |
| ANZ | 4.29 | 3.25 | 104 |
| ASB | 4.29 | 3.45 | 84 |
| BNZ | 4.29 | 3.45 | 84 |
| Kiwibank | 3.99 | 3.30 | 69 |
| Westpac | 4.29 | 3.45 | 84 |
Two year swap rates could conceivably rise by more than +0.80%.
But things are likely to be 'worse' than this. The earlier benchmark rates we are using to compare are from when rates generally were falling and expected to fall further. Now the shoe is on the other foot - background rates are rising and are expected to rise further.
There is some way to play out here. But borrowers wouldn't be wrong to assume future rates will be substantially higher than today's rates.
And a key reason is that our CPI is now being driven by tradeable inflation (imported inflation). This too is very unusual, and that influence hasn't been around for many decades.
Daily swap rates
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104 Comments
or the other words commonly used is the recessionary spiral - its now a balance a very very delicate balance
its also why most countries (ie Australia) tighten lending standards before the housing bubble balloons to something like 30%-40%.
NZ cant say it wasnt warned - IMF and the ratings agencies all raised red flags back in Feb and March
Good call frazz.
Interesting, last April I was calling the BNZ five year 2.99% rate as being prudent based on bank economist comments (you know the ones involved in deterring rates). Quiet a number of this site rubbished it as they knew better - some should be eating their words.
Any comment flyer and dumbandbroke?
T'will be Interesting to observe the effects on house prices, affordability, and investor/FHB mix.
And let's not forget commercial/business financing rates, which are an input to most consumer prices.....
Coupled with inflating import costs - both goods and transport - inventory replenishment via working capital, financed via OD or secured loans, will become a tightrope to walk for many.
When mortgage rates hit 5% next year, that 1M mortgage on a fibro-shack or shoddy terrace-box in some ghastly corner of Auckland is going to require just under thousand dollars a week of dead money just to service the interest costs alone.
Then add rates, insurance, body corporate fees, maintenance, principal repayments, all while the cost of groceries, petrol and everything else is going through the roof and a flood of townhouses is hitting the market.
There are some very interesting times ahead, the astute investor would be determining if today's valuations make any sense whatsoever in that world and especially so when slumlords are no longer able to deduct interest costs from their tax bill.
There is a buyer's market coming... it's just a matter of time.
OK, fair enough, but many of the crappy 2 bedroom shoeboxes are going for circa 750-800K, in West Auckland, South Auckland. That was what I was talking about.
Having said that, I saw Fletchers advertising a 2 beddie in Glen Innes of all places for circa 900K the other day....madness
What a bargain!!!
If you really put your mind to it and think about it, for the luxury of owning a million dollar property, it's only obvious that you borrow a million dollars to get it.
If property doubles every 7-10 years, this property would be at least $2m - $2.5m by 2035.
It's not unreasonable, inflation is getting way out of hand and far above RBNZs upper threshold. If they let this go on it'll be too difficult to break the cycle. My guess is they raise 25bps at all of the next few meetings, inflation only being measures quarterly they just need to keep signalling they are prepared to get a handle on the controls.
Watch the Northern Hemisphere this winter.
Global EROEI is too low, and even at these fuel prices, not many 'next' options open up.
Atop that, global debt is too high and unrepayable, and everything depends on fossil energy, so EVERYTHING is going to get 'more expensive'. To people who have never carried as much debt already already.....
Politicians will hide the truth; economists will help them do that (bit like old-school priests backing pie-in-the-sky-when-you-die) but this is inexorable now.
this time last year a 12 month rate bottomed out at 2.29%. If they rise to 3.89% - which is only .8% on todays 2.99% then for a
500K loan - monthly repayments rise from $1921 to $2355 per month or $430 extra per month
750K loan - repayments rise from $2882 to $3533 or $655 extra per month
$1M loan - repayments rise from $3843 to $4711 or $865 extra per month
Thats a lot of money families need to come up with in an economy where fuel is at record prices, rates are up 5%-7% (roughly $30-50 more a month in most councils) food is up 5-10%.
the question is what luxury goes first - will it be dining out, holidays, new car.
It seems that the Bank of England are in the same bit of bother, with the FT reporting
"The governor of the Bank of England warned on Sunday that it “will have to act” to curb inflationary pressure, making no attempt to contradict financial market moves that have priced in the first interest rate increase before the end of the year."
Although I am hoping that we return to a wolrd where the value of something is the sum of it's future cashflows, I just feel for all those looking now at the whirlpool.
I wouldn't want to bet on it, but this might be the top.
Interest rate rises -- and more (probably) on the way -- no sign of inflation abating -- a lot of inventory coming online shortly... I think the market will be slightly queasy by the end of the year. Probably not down much in nominal terms, but looking a bit shaky at the knees...
"A much larger rise in inflation, especially tradable inflation, has turbocharged wholesale swap rates with more in prospect, signaling giant mortgage rates are ahead"
Mr David, not to worry as Mr Orr is an expert and will find a way to support the ponzi.
Wait and Watch.
PS : How could Orr or Jacinda screw NZ economy = Housing Ponzi.
Question is do people refix their mortgage tomorrow for a longer term (if it makes sense), or do we think the economy will be stuck in a loop now. Too much debt to service high interest rates, consumer spending dries up and the RBNZ drops rates within 18 months.
Good luck predicting anything these days
Hey guys I whipped up a spread sheet to see what the best deal is depending on what you think the interest rates will be for the next 3 years. Makes some basic assumptions like paying the same amount of principle each year. But its quite interesting to see what the 1 year rates have to be for the 2 year term or a three year term to be the best option.
https://docs.google.com/spreadsheets/d/1xyN8stTcpPxEVEaXHKggCbC9onXw2bl…
Comments welcome, I am rather sleep deprived haha
You are right. It is funny how easy is it to manipulate people by media, then politicians, then real estate agents.
All make promises of rosy days coming in the future and everything will be alright.
There is an old saying, no pain no gain. So is the new world, did everything think that all the gains will be easy and there will me no pain?
What will be fine?
I do not understand your logic. What is fine and good in your brain?
Nothing is going good on this economy right now. We are creating big deep craters for future generations. That is not fine or good in any sense.
It only looks good and fine for those having greedy goggles on them.
I say it based on what I have experienced and observed. Right after the Asian Financial crisis, Helen Clark's Labour government opened the gate; that's when I came to NZ; after the GFC, Key's National government opened the gate. This time Covid may force NZ to close the gate temporarily. Still, it doesn't stop the government from granting 165k people who worked for the country since the beginning of the outbreak (in a way, I think NZ has shown appreciation to these people and taken a high moral ground). Once we connect to the world, young NZers will emigrate again, and immigration will happen again to offset the impact. Suppose you trace the policy changes back to the 1970s. In that case, you will find it is fundamentally why NZ immigration gradually changed from focusing on race/nationality to merit and skills.
Speaking of the end game, I think the property market booming will reach a stop when multi-generations need to invest in a single property, just like what happens in Germany. I don't know when we will get that thou.
Imagine if a few hundred Chinese investors have to liquidate their Auckland investments to make good on their commitments in China. What does that do to the Auckland market? Worse still if they have to make a choice about which properties to default on. The apartment in Auckland or the apartment in Shanghai.
If I recall correctly there was a huge percentage of fixed home loans coming due about now. What I see is interest rates rising sharply but in effect this will not impact existing home owners for quite a few years, like 3 to 5 years because they have already locked in a low rate. 3 to 5 years will get them out of trouble because all things going the way they have, the house will be well out of the red and be worth yet another 20% over what it is now. For people that think house prices cannot keep rising, I think your wrong. Houses are hard assets and a basic requirement for a normal life as we now know it. You can take a pass on many things but shelter is only below food, water and air to breathe.
No one who needs a house is buying one without a mortgage. New mortgages are at the higher rates. There is already an effective decrease in how much FHBs can pay. Unless investors take up the slack, or wages rise commensurately to make up the difference, prices will fall.
You are right that houses are hard assets and a basic requirement for life as we know it. But why do you think that means that house prices must keep rising? Did houses cease to be hard assets and a basic requirement for life in Japan in the nineties and in Ireland and the US post-GFC?
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