Now is a great time for borrowers to fix their loans because financial markets have got their expectations for future Official Cash Rate increases wrong, Westpac chief economist Dominick Stephens argues.
In his weekly economic insight Stephens says financial markets have got carried away with the softer tone to New Zealand economic data over the past few months.
"Since early July what we've seen is a general downward trend in swap rates and now we're starting to see fixed mortgage rates tumbling as well," says Stephens. "Now I think that's throwing up a great opportunity for borrowers to fix their interest rates because financial markets, in my view, have got this wrong."
"Financial market pricing indicates an expectation of only one more OCR hike by June next year, whereas we are forecasting three hikes over that same timeframe," Stephens says.
Home loan borrowers have already been flocking to fix their mortgages this year with the Reserve Bank having increased the OCR four times, by a combined 100 basis points, to 3.5%. The latest Reserve Bank data shows, at the end of June, 68.5% of all mortgages by value were fixed, the most since March 2010.
Stephens says although the housing market slowed earlier this year, the latest data shows it's regaining momentum.
"And frankly I can't see it doing anything other than gaining further momentum," says Stephens.
"This week's net migration data was near an all time high for the month of July at 4,500 new people flowing into the country. Actually we think annual net migration is going to reach almost 50,000 people, which will be an all time high for New Zealand, and could set New Zealand at the top of the OECD population growth rate tables."
Additionally he says deteriorating export conditions are starting to stabilise, with this week Fonterra's dairy auction, roughly flat or down 0.6%.
"But perhaps most importantly for the Reserve Bank we're now starting to see the exchange rate drop. As we speak we've fallen below 84 cents against the US dollar because the United States Federal Reserve has come out and sounded more keen to lift interest rates. What that's going to do is reduce the interest rate differential between New Zealand and the US, which puts less upward pressure on our exchange rate," says Stephens.
Against this backdrop New Zealand is "in the grip" of a big construction boom that's causing unemployment to fall and inflation to rise.
"So all in all I do think the Reserve Bank will re-enter the fray next year, and will continue to hike the OCR. (So) it's a better idea to get in now and fix your borrowings before that's obvious to everybody," Stephens says.
At the Reserve Bank's most recent OCR review, on July 24, the OCR was increased 25 basis points. However, the Reserve Bank signalled a "period of assessment" indicating a pause before any further hikes. The upcoming dates when the OCR will be reviewed are September 11, October 30 and December 11 this year, and January 29, March 12, April 30 and June 11 next year.
Although floating mortgage rates have been rising along with the OCR, two, three, four and five year fixed-term rates are now at similar levels to where they were when the Reserve Bank started increasing the OCR in March.