By Bernard Hickey
Those thinking of fixing or floating or buying or selling in the next 10 days should take a deep breath.
Banks jumped the gun last week by cutting their fixed mortgage rates in anticipation that the Reserve Bank of New Zealand would cut the Official Cash Rate by as much as 0.5% this coming Thursday.
ANZ moved first on Tuesday morning, cutting most of its fixed mortgage rates and those of its subsidiary National Bank. In particular, ANZ cut its one year mortgage rate by 0.5% to 5.95%, but left its floating mortgage rate unchanged at 6.20%. See Gareth Vaughan's article here on ANZ's first move.
This changed the rates landscape because this dragged ANZ's one year fixed rate below its floating rate for the first time since November 2009. It was followed by Thursday morning by all of the main banks. See our earlier article here on the banks responding.
They were responding to a fundamental shift in New Zealand's economic outlook and a slump in wholesale interest rates in the wake of Christchurch earthquake. Banks tend to fund their fixed mortgage rates from wholesale markets for money. These are known as 'swap' rates. The 1 year 'swap' rate fell from 3.37% the day before the earthquake to 2.92% on Friday. See our interactive chart below.
The wholesale markets moved in anticipation that the Reserve Bank would at least stop increasing interest rates through the rest of 2011, as it had indicated pre-quake, and might actually cut them on Thursday when it releases its March quarter monetary policy statement. Markets are now betting that a 0.25% cut is a sure thing and there's a better than 50% chance of a 0.5% cut.
This is slightly surprising given there remains significant uncertainty about a cut.
Economists from BNZ, NZIER and JP Morgan have said an interest rate cut may be a blunt instrument and targeted government spending would be the best way to boost the Christchurch economy.
Research on what the US Federal Reserve should have done after Hurricane Katrina found the Federal Reserve would have been better off raising interest rates to contain inflationary pressures, rather than cutting interest rates.
There are already reports of prices of petrol, construction goods and groceries rising in and around Christchurch. Commercial rents in some areas have doubled. The New Zealand dollar also fell to its lowest level since mid 1985 against the Australian dollar last week and is down to its lowest level in almost a year on a Trade Weighted Index basis. The currency weakness will increase the price of imported goods, adding to the inflationary impact of the oil price's surge through US$100 a barrel.
Wholesale interest rates could rebound in the coming weeks if they are disappointed by a Reserve Bank decision to leave rates on hold. That might make the low one year rate attractive in the short term. But should those who have chosen to float over the last year -- and most new borrowers have -- jump back into a fixed mortgage?
The safest option is to wait for the Reserve Bank's decision on Thursday and see what the banks then do about that. If the Reserve Bank cuts the Official Cash Rate then the banks should cut their floating rates by the same amount anyway, meaning anyone on a floating rate benefits almost automatically.
The only loss in any decision to sit on your hands for 10 days is the potential difference between 6.2% and 5.95%.
If, as now widely expected, the Reserve Bank does not lift the Official Cash Rate for the next year then a floating borrower loses little and retains the flexibility to ride the rates lower in future. It all depends on your interest rates outlook.
The chances of big rate hikes soon were destroyed on 12.51 pm on Tuesday, February 22.
No chart with that title exists.
20 Comments
My mortgage is small now, $37K and I am floating all the way now as it will be paid off by the end of 2011. I am one of the luckier ones I admit as I have a well paid job.
If I was in a position I was in 2 years ago when my fixed 9% mortgage came off and I owed $130K I would do what I did then, float some and fix others. I paid off more of the floating segment to get it to zero.
It is a great feeling to get the mortgage down in these times, at least you will have no worries about paying rent or a hefty mortgage if I lost my job. Local Auckland rates are another matter though..............
The best status... there is a solution to local body rates. Each 3yr revaluation lodge a protest with QV. They automatically cut your valuation by 5% or more with the current declining QV house value stats. This lowers your rates bill or at least mitigates for the constant council rates levy increases. And over time compounds to be very worthwhile especially over multiple properties.
Done that over the years, helps a bit, but I don't have multiple properties.. The problem is that being on the North Shore we will pay higher rates than we would under NSCC as we have valuable land and the land component for the area as a whole will increase as we are lumped in with lower land value areas such as the old Manakau. Funnily enought their rates may decrease under pre amalgamation structure if you live in Manurewa, Otara etc than what they were before under MCC. Brown's payback to people who voted him in.........
Think TWICE befoe lodging your objection, we've been throught it. Our family home in Wellington - My parents always made a point of lodging their objection everytime the new GV came out. It was good idea at the time until they tried to sell - their GV value was so low and it influenced the private valuation.
Yes, I know the GV figure means diddly squat but buyers always treated it as a yard stick and that includes myself!
Wrong mr Mao, anyone worth their salt will gain independent professional valuations and it is easy to show the record of QV changes and why.
Using the above is why some places have a QV very much lower than similar in the street. Sure saves on the rates and unless your ego or dinner conversation consists of how big is my house price it saves heaps compounding.
Oh the other reason for not doing it is because you are up to your eyeballs to the bank in which case you are probably stuffed now anyway.
You can tell that to the person who do your private valuation, he/she wouldn't risk of getting it wrong! and the potential buyers. I certainly wouldn't make my offer way way above govt valuation..
But I guess different folks different strokes.. And almost everyone will have to sell at some stages.. oh I love how people like yourself making assumptions without any facts... I only have a tiny mortgage.
Anyone who makes an offer based on QV would be mad. QV is a statistical process with few ground validations. The specific property may have improvements that QV have not allowed for or aspects (seaviews, nature views, sunlight etc) that QV has little appreciation of.
Getting compounding 5% discounts on my rates is saving me heaps. Good luck with your Auckland 4.9% levy increase + any revaluation increase of another 4-8%. Just as well you have paid down the mortgage, you may need to balance to pay to the council.
We should have ours paid off in a couple months too. We've been doing it hard the last few years and paying it off like crazy.
I've been tempted to lodge a dispute for exactly the reason of saving money but I'm afraid the buggers would come and inspect the actual house and see all the reno work we've done and put it up even higher! Because mostly it's the land that has bumped the rates up so much so far and I don't think we can argue that down.
Still can't understand why people keep mentioning oil and commodity prices as reasons to keep the OCR higher. As if raising the OCR will do anything to contain global oil and commodity prices? They have gone up and we all need to pay for it through higher prices. We can't hide from the problem by raising the OCR so the NZD strengthens to mask it. Ultimately we would pay for it anyway it would just be via reduced export income and higher borrowing costs rather than at the pump.
People want lower borrowing costs so we can pay down debt and a reduced NZD so we can boost imports and improve our deficit. There is no high wage inflation problem or overheated domestic economy to tame.
SO PLEASE WILL EVERYONE STOP ARGUING FOR A HIGHER OCR, IT MAKES NO SENSE!!!
@Julz: "The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank to meet the inflation target specified in the Policy Targets Agreement." That's it. Nothing to do with rebuilding Christchurch, or anything else - just a price inflation targetting instrument. And if you think inflation is not going up in Christchurch, then have a look at whatever the prices are for pretty much anything down there, or anywhere else in NZ for that matter. The OCR, by it's charter should only go...up!!
(PS: I guess it's 'exports' you want to boost in your last post, not imports?)
In reality though Bollard has more wriggle room than that by using the clause "over the medium term". He does not need to raise the OCR for one-off price adjustments like a GST increase or a jump in oil prices. It would be pointless and ineffective if he did since he can only control the level of spare cash floating around in the domestic economy. Christchurch is a specific issue that should (and is) being addressed by government intervention, they will not thank you down there if you suggest their borrowing costs should go up on top of all their other woes.
and yes thanks I did to mean to say exports no imports above…
Dr. Bollard has been' looking through' price inflation for some time now. Whatever tools you think the Government should use to help Christchurch, the OCR shouldn't be one. It's like our Reserve Bank saying " Here's how we are going to supervise the financial sector of the country; unless we decide not to". You can't run a national economy based on that type of uncertainty, no matter what happens. If we don't like the OCR mechanism or what it is supposed to do. Fine. Change it. But there are procedures to that, and an earthquake isn't one of them. If the OCR is lowered I shudder to think how the world will view the way we run our economy - now, and in the future. You'll get a lower NZ$ alright! And petrol at $5 per litre to go with it......
I don't think oil and commodity prices are a reason to keep the OCR higher. Of course if they have a major impact on inflation I might rethink.
10 years ago when I had a mortgage I thought an interest rate of 7.5% on a mortgage of $240k was a great rate. It only got tight when the household was reduced to a single income. I don't own my own property anymore but I'd love to if I could do it with same size mortgage.
I think the OCR should go up to 5% so that all the sheeple/speculators might actually learn a lesson from their debt fuelled consumption. They've been bailed out by the RBNZ as much as the financial institutions that provided the excess credit.
Many continue to make the mistake of thinking a QV is a Government valuation for a property like in the old days. IT IS NOT! QV stands for Quotable Value. This is the name of the organization doing the valuations for "Rating purposes" Housing are no longer individually inspected, you would be lucky to have one in ten inspected. In many cases as far as the total property value is concerned, they are irrelevant, yet so many still place far to much faith in them.
Julz, your arguments for lower interest rate are very logical. The proponents of high rates would argue incentives for savings etc ,however many countries with much lowers interest rates have better saving record than NZ. higher interest rates have attracted more caiptal in NZ which then leaves with added interest.
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