Westpac's chief economist Dominick Stephens argues now's a great time to fix loans because financial markets have got it wrong

Westpac's chief economist Dominick Stephens argues now's a great time to fix loans because financial markets have got it wrong

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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16 Comments

Personally, I was thinking the opposite  -  quickly get off a 6 month rate & get ready for lower rates in 2105.
And stay flexible to pick up any of the cash deals on offer.

True , when Banks start telling you to fix , you must know they really really really WANT  you to fix ...... .
Dont ever be fooled by what appears to be the Bank's  altruistic press releases and  advice , they are self-interested , and not interested in you or your wellbeing at all .
Banks are massive profit driven machines , and you need to ask whether they have your interests at heart .
They dont .
Its not in their interest to have such a large number of floating mortgages , as its disruptive to their funding mix when OCR rates go up , and it causes all sorts of risks to emerge .
Because Banks floating  mortgage funding is sourced locally , it means their margins are tighter 
 
When they tell you to fix ........do the opposite

Have you ever worked in a bank, specifically with bank funding and profitability measures?

Boatman, with respect, youre better than that, speculating on something that youre clearly not informed about. Can I assure you as someone once in that a position to know the truth, bank economists do not push fixing or floating for any reason other than they are there to try to advise their customers on what they think will happen. They get it right sometimes, wrong other times, but I can assure you that they take pride in trying to get it right, are frustrated when theyre not, and certainly are not going to be driven in view by others, including their bosses if that was expected - and its not expected because banks don't really have a preference for either, except in the case of highly leveraged vunerable borrowers wheer they would certainly like to see them employing some risk mangement practice as a consequence.

Given Dominick's track record........LOL.
Not so sure on the lower rates until something big happens, becareful what you wish for....
regards
 
 

Would have to agree with Mortgage Belt - the European and USA economies are likely to slide back into GFC style territory and interest rates around the world plummet. Add to this the civil unrest developing in many countries and current wars in others and more likely we will see mortgage rates sub 5% mid to late 2015 and all those who have fixed for 3 years recently will be regretting it. If you are tempted to fix screw your bank down - they have record margins and can afford to give you at least half a percent discount on floating for fixed mortgages.

Slide back into GFC, yes, but interest rates are in effect just about zero now.....so I cant see how they can  plumet.
regards

You can't get a real fixed mortgage in New Zealand. 2-3 years just don't cut it.
Young folks I know just got a mortgage in Washington DC.
3.25% fixed for 25 years. No exit penalty.
Why would that not be available here. Why should we be pushed to fix at around an astromonical 6% for a miserable year or three.
Time to bust the New Zealand bank monopoly methinks.

And the high break fees  -  that lock you in.
 

Mainly in the US, the banks can trade long term (20yr+) bond.

If there was a market for 25 years swaps, then NZ banks would offer such a mortgage.  Who is going to be on the other side of the 25 year swap trade?

Yet ppl buy long term bonds?
regards

Dominick an old trader once told me going against the market is like standing on the tracks and saying stop to a freight train you tend to come off second best. He said the market knows things that the best traders don't even know. So how much of your money are you putting on your predictions?

Stay floating , the world economy is too unstable to worry about interest rates rocketing upwards

I remember when I was much younger following the advice of bank economists......I have not followed their advice ever since!!! 
 
"Now is a great time for borrowers to fix their loans".........if I sell a product, goods or services I have to guarantee whatever it is that I'm selling.......so will the bank economists stand behind their financial advice????

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