David Hargreaves has a crunch through some mortgage data that shows Kiwi homeowners are very busily going 'long' with their mortgage interest fixed terms

Ready, aim, fire!

Much was made at the outset of this rising interest rate cycle about how much 'bang for its buck' the Reserve Bank (RBNZ) could achieve as it started to crank up the Official Cash Rate (OCR) from the emergency pandemic setting of 0.25%.

The general consensus last year was that the RBNZ had plenty of firepower at its disposal because of the fact that relatively few people had fixed their mortgages for long terms. Hence the theory that any rises in interest rates would quickly affect mortgage holders because these holders would relatively soon face the higher rates.

This consensus was indeed very much true. Bang. For. Buck. And much more on that shortly.

First though, it's worth just breaking down the hiking cycle that began last year into two parts. 

The RBNZ didn't actually begin raising the OCR till October of last year. It's easy to actually forget that.

However, it did much to kick off rising interest rates when its May Monetary Policy showed a 'forward track' projection for OCR levels in the future much higher than the financial markets had expected.

It was the financial markets that picked up the interest rate cue and ran with it - sending wholesale interest rates much higher. And then the banks reacted to these rising rates (a key part of their funding) by starting to move mortgage rates up.

So, while the RBNZ 'officially' started the hiking cycle with that first OCR move in October (a mere 25-point rise, pah! Nothing!), the action in the marketplace was already well under way.

Mortgage rates hit the rock bottom of the 'down' cycle in June of 2021. According to the RBNZ's monthly averages of fixed 'specials' from the banks, the one year rate was just 2.2% in June a year ago. By September, however, the one-year rates had already risen to over 2.7%. Remember this before the RBNZ had moved the OCR.

So, to go back to June 2021 then, and a market that was starting to now prep itself for higher rates, how was the general populace placed for the rigours of a nice mortgage rate hike?

Well, the general populace, accustomed to ever-falling rates had been going ever shorter with its mortgage rate fixing. That's what happens when you keep expecting rates to fall. Why go long?!

A crunch of the RBNZ statistics shows that between them owner-occupiers and investors had just over $275 billion of fixed rate mortgages as at June 2021. (For the record, the amount of mortgages on floating rates has stayed remarkably stable in and around $50 billion over the past year).

So, $275 billion of fixed rate mortgages - of which just under 75% was due to be refixed in a year or less time. In other words, any upward moves in interest rates would 'get at' 75% of the fixed mortgage money out there in 12 months time or less. That's bang for your buck with a capital B.

I was interested to see how people have reacted with refixing and putting their financial, er, houses, in order. And boy have they reacted.

If we take it by the quarter, the amount of mortgage money up for refixing in 12 months or less was just under 75% in June 2021, under 68% by September 2021, about 58% by December 2021, 55% by March of this year and by June, the latest available month, 50.5%. 

That's an amazing drop in a year. And it will have continued.

Yes, it's safe to assume that already the amount of mortgage money due to refix in 12 months or less is now under less than half. That's still a fair bit, but it's a lot less than it was.

To quantify this a little bit, as of June 2021 there was just $68 billion of outstanding owner-occupier and investor mortgage money that was at a rate fixed for longer than a year.

As of June 2022 the directly comparable figure stood at just under $146 billion. That's $146 billion worth of mortgages that won't now be affected by whatever the RBNZ does in the next year. Of course though, much of that money will be at higher rates than it was.

(It's worth adding here that the total amount of fixed rate mortgages held by owner-occupiers and investors increased by less than $20 billion between June 21 and June 22 to a total of nearly $295 billion, with overall new mortgage growth having slowed so much recently as the housing market has dipped. So, we can see that most of the change in duration of fixing is due to existing holders who have re-fixed.)

In terms of what people have been refixing from and fixing to that obviously depends what duration of term they were on and when they refixed. 

As I opined a couple of months ago, June of this year effectively represented 'peak mortgage shock time' since it was 12 months on from the bottom of the interest rate cycle. 

What this means (using RBNZ averages again) is that someone on a one-year rate as of June 2021 might have refixed (for the same term) at 5.1%, while someone else might have gone from a two-year rate at 2.7% to a new (two-year) rate of 5.5%.

That opine from a couple of months ago highlighted a blood curdling example of the kind of extra costs that households might face.

We are still very much in the wait-and-see period at the moment but, do you know what? I think the RBNZ at this stage might be disappointed that there are not bigger signs of a slow down in consumer spending.

It is slowing, but not at this stage precipitously.  

Why might this be the case?

Well, obviously not everybody is getting hit equally at all with interest rate rises. The people most vulnerable are, for example, those that took out Auckland-esque $900,000 mortgages at an interest rate of 2.2% and are now paying 5.1%. Ouch.

Those people are out there, but they are at the extreme end of the range.

There's other folk, plenty of them, with good equity in their homes, not massive mortgages, and who were able to enjoy the super low rates by paying extra on their houses or stashing money.

And yes, stashing money. The official stats show us that from the start of the pandemic we have been able to squirrel away a fair bit of that stimulus cash that's bee floating around. We've been saving. 

So, it could be that despite the apparent 'bang for its bucks' the RBNZ has had, there are large parts of the population that have been to this point relatively unaffected.

However, nobody can be sure (because people won't say) the extent to which maybe the higher mortgage payments are gradually chipping away at savings, or removing the head-start some had on their monthly repayments. We don't know. But it's possible. A kind of delayed bang for the buck.

Statistics New Zealand's household net worth data for the March quarter showed that having come off an extremely strong position of savings during the peak pandemic period, Kiwis had spent nearly every dollar they earned during that quarter. It has to be imagined these figures will have worsened in the June quarter. We are no longer saving. 

Remember too, the borders are open now. We are now free to leap off overseas and (over)spend on the cards again. And the credit data shows that IS happening.

It could all be a delayed effect then. The slowdown may suddenly hit in earnest.

But as I say right now the RBNZ may not be entirely satisfied its efforts are taking enough steam out of the too-hot economy.

And yet as the figures above demonstrate were are already now well through 'peak mortgage shock' time. 

Further OCR rises from here will have decreasing 'shock' power. 

Potentially, what that does mean is the RBNZ may feel compelled to keep interest rates higher for longer to effectively grind the economy slower over a period of time - and to allow things to happen such as the depleting of savings etc, so, that people do spend less. This picture could change if inflation imported from overseas dies away - but there's still massive uncertainties about that.

There's plenty to keep our eyes on here. I'm very interested in whether and what signs of stress we may see from some of the people who climbed in right at the top of the housing market (and bottom of the interest rate cycle). I'm also interested in what happens to our spending patterns over the next two or three months. And what of our savings? Are we now set to start raiding our piggy banks again, having saved so well over the past couple of years?

As I keep saying - whatever happens, it ain't going to be dull.

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