The figures tell us that Kiwis weren't ready for mortgage interest rates to go up in 2021. But they sure as heck were ready for rates to start coming down in 2024.
Boy, were they ready. And waiting.
The key question now rates are easing again is just how quickly they will fall. But more significantly, when will people feel the benefit? And that last sentence is the tricky bit.
For example, Reserve Bank (RBNZ) figures showing the returns the banks were getting from existing mortgages paint an interesting picture. The effective rates people are paying were still rising as recently as June 2024.
What the figures show is the average bank mortgage yields bottomed out at 2.83% in September 2021 as the historically low interest rates that we saw for a number of years found a bottom - before then starting to rapidly rise. As of June 2024 the returns were averaging 6.25% - and were still actually rising, even if advertised new mortgage rates have been easing now for some time.
It's to be assumed that the yield figure will start falling fairly soon now, if indeed it hasn't already starting dropping. But the big question will be how soon will lower rates start to make a significant impact for people?
I've been having a bit of a crunch of the RBNZ's data sets again and what's very clear is the extent to which the country's mortgage holders were lining up waiting for the the RBNZ to cut the Official Cash Rate, which it did on August 14.
We know from tracking the monthly figures on what duration people are fixing for that the trend since the start of this year has been for people to go shorter and shorter. This has, in a way, completed the cycle.
To go back a bit, when the RBNZ began the OCR hiking cycle in October 2021 it appeared to me that a very significant proportion of mortgage holders were caught out. Even though interest rates were at historically low levels, whether you were looking at one-year fixed rates or five-year fixed rates, most people favoured short duration fixing. This appeared to stem from a widespread and erroneous view that because interest rates had been low for so long they would remain low. Whoops. Caught out.
To take the low point of advertised mortgage rates, June 2021 as an example, according to the RBNZ's monthly data series that shows the times to next repricing, 45.6% of the total mortgage monies outstanding as of June 2021 were either on floating rates or fixed rates for six months or less. Some 78.4% of the total was either on floating or for fixed terms of one year or less.
So, in layperson's language it meant that any rises to interest rates were going to have an impact on over three-quarters of the mortgage money in a year. Therefore, once the RBNZ began hiking it got a good 'bang for its buck'. People were quickly affected by the higher rates because their mortgages were soon up for refixing.
Making the adjustments
There was a swift adjustment. By June 2022 folks were going 'longer'. At that time just a third of the mortgage money was either floating or fixed for less than six months, while just 56.5% was due for re-fixing in a year. Quite a change.
However, as we got into 2024 and so the expectation grew of OCR cuts, then so, mortgage holders began swiftly repositioning.
By June 2024 we were very ready for cuts.
Of the $361.106 billion mortgage pile outstanding as of the end of June 2024, some 48.1% of it was either at floating rates or fixed for six months or less. Remember, before the OCR started going up the comparative figure was 45.6%.
So, we might have been caught 'short' when the OCR started rising, but we weren't going to get caught 'long' once the OCR was on the way down!
What this means is that something like half the country's mortgage holders will be able to start getting the benefit of mortgage rate reductions before the end of this year.
It's significant. But how much better off will they be, if at all?
To take just the popular one-year fixed rate as an example: If we go back to June 2021, according to the Reserve Bank's monthly averages of new 'special' rates, the average new rate was just 2.21% (those were the days!)
By June 2022 this had shot up to 5.11%.
By June 2023 it was 6.88%.
By June 2024 it was 7.06% (down from a peak of 7.30%).
How soon will they fall?
As I write this the average one-year rate is 6.65% and falling on a just-about hourly basis, so frenetic is the activity among the banks. They were ready for OCR cuts too - and of course their mortgage rate reductions preceded the first OCR cut.
If we were to take a hypothetical home buyer from back in June 2021 and assume they took out a one-year fixed rate and then re-fixed it for one year on each subsequent occasion, well, it will not be till next year that they would start to get 'relief'.
And how much? Well, that's the question, isn't it? So far the falls we've seen, while undoubtedly being welcomed, won't yet make much difference. So, how much more relief might be in the pipeline over the next 12 months?
So far the RBNZ has dropped the OCR by 25 basis points - to 5.25%. In its August Monetary Policy Statement the RBNZ forecasts suggest the OCR could be about 4.50% by June of next year - so, a further 75 basis points lower than now.
But that's just the RBNZ's forecasts, which it tells us we shouldn't regard as gospel.
The ever-eager financial markets have current pricing that suggests the OCR could be about 3.50% by June 2025. This sounds a little optimistic.
Certainly, though, there's some economists who reckon the RBNZ might now do a steady 25bps cut per review from here on the way down.
And there's five more reviews between now and June of next year. So, that might suggest 125 bps of cuts.
How much of that would translate to mortgage cuts?
Well, the banks are pretty keen to get things going down so far.
If we talk again about the one-year fixed mortgage rate, on average this has already dropped around 65 basis points from the peak level of 7.30%.
If we got say 100 basis points of reductions to the OCR between now and next June (taking the OCR to 4.25%) and this was all - and perhaps a bit more - passed on to mortgage rates, we could see one-year rates of 5.5% by the middle of next year.
Not much relief yet
Interestingly though, to look back again, a 5.5% rate would still be much more than double the rate someone was paying in June 2021 and would still be more than what people were paying (5.11%) in 2022.
We know that during the 2020-21 pandemic period a lot of kiwi households built up good savings buffers. And a lot of people got ahead with the mortgage payments. We don't really know to what extent the consistently much higher mortgage rates over the past two years have now eroded the financial positions of households - and therefore how quickly these can recover.
Non-performing mortgage figures have risen, but not extremely so. Really though, we know from past experience that in times of some hardship households always prioritise meeting mortgage payments. It's other spending that falls by the wayside. And with the country having experienced negative GDP growth in four out of the last six quarters, and the RBNZ forecasting negative GDP again for both the June quarter (not yet reported) and the September quarter, we can see that things have ground to a halt. The housing market's been going down again too.
When are people going to 'feel wealthier' again and start to properly spend again? And therefore get the economy moving again?
One thing to very much bear in mind is that according to the RBNZ only about a third of the population have a mortgage. So, those without a mortgage will not be so constrained.
Another thing to keep an eye on is the other side of the interest rate equation - the deposit rates.
During the very low interest rate period household term deposit balances sharply diminished and then bottomed out at $80.67 billion in September 2021 and, hey, I can remember what a waste of time TDs felt like at that time with one-year rates offering only around 1.00%!
Since then though the money has poured in, with over $50 billion extra being locked up in TDs. As at June 2024 there was a grand total of $133.958 billion in TDs.
With deposit interest rates now falling again, at what point do people start to decide it's no longer 'worth' having money in TDs? I think we are probably some way away from that yet, given that at the moment rates of over 5.5% are still available for the popular six and nine month durations.
Where will the money go?
That will change though. And when money leaves the TDs, where will it go? Well, we know from previous experience where it tends to go in New Zealand - into houses.
And it is worth having some idle rumination about the impact the extra $50 billion that's found its way into TDs in the past three years could have if it redirects into the housing market. If it was put into 30% deposits it could fuel the purchase of well north of $150 billion worth of houses. Quite a splash.
And by extension, such a spurge would also see something more than $100 billion worth of mortgages advanced. The banks would like this. Oh yes.
In the first six months of 2024 there was just $32.808 billion worth of mortgages advanced. Now that is up on the super-low $28.522 billion in the same period in 2023, but down on the $36.24 billion in the same period in 2022 and trailing in the wake of the supercharged $50.381 billion we saw in the first six months of 2021.
So, there's two interesting aspects to the falling interest rates. How quickly will we see households with mortgages get back spending as they were before? And how quickly will money that's been locked up enjoying higher deposit rates move out and start, well, being spent?
This is going to be one of the keys to how quickly the economy recovers from the trough it is in.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
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