Mortgage Update - September 3 2010 September 3, 2010
Welcome to the latest installment of Mortgage Update on the Fundit blog, where I review the bank’s regular economic reports, and, along with my own views, presenting the relevant points in an easy-to-read format. I welcome your questions and comments – feel free to send them through to glenn@fundit.co.nz
Economic uncertainty, oh how I missed you. Just when I thought myself free of your roguish charms, there you are, in from the cold, glorious, triumphant. Double dip? I’m not even sure Mr Whippy does that anymore, and in any case their chocolate tastes like cardboard.
What a couple of weeks. Talk of double dips, deflation, inflation and South Canterbury is making my head spin. What does it all mean?
One of the more important implications as far as mortgage rates go is what will happen with the OCR. The Reserve Bank was, up until two weeks ago, fairly confident in repeating that its outlined plan of slow OCR increases was continuing, regardless of the increasing economic uncertainty. The consensus of market commentators is that this is no longer tenable, and that planned rises in September and potentially beyond will have to be delayed.
“Four out of five bank economists have pulled back their Official Cash Rate (OCR) expectations with a pause now expected in September as a result of uncertainty in the global outlook and a string of weaker than expected domestic data.”
http://www.mortgagerates.co.nz/article/976497216/no-ocr-hike-expected-till-december.html
Some (such as the New Zealand Institute of Economic Research) are going further, arguing that the pause will continue until March 2011:
“The Reserve Bank will pause in raising interest rates until March 2011 given near term growth risks and distant inflationary pressures”
“Principal economist Shamubeel Eaqub says interest rates for households and businesses are much higher than the Official Cash Rate (OCR) or wholesale interest rates which is strangling the recovery with little growth in borrowing.”
http://www.mortgagerates.co.nz/article/976497229/nzier-pause-in-ocr-till-march-2011.html
In any case, this has caused the market consensus opinion of future interest rates to adjust to take into account the new, lower expected future interest rates.
This has been compounded by reductions in international long-term wholesale borrowing costs, as an inducement for people to borrow in less certain times.
What does this mean for mortgage rates?
Longer-term rates have come down, as would be expected given the new market consensus of an early end to the Reserve Bank’s OCR-raising plans and increasing international uncertainty.
| Term | BNZ | ASB | ANZ | Kiwibank | National | Westpac |
|---|---|---|---|---|---|---|
| 6 months | 6.30% | 6.35% | 6.35% | 6.35% | 6.35% | 6.25% |
| 1 year | 6.49% | 6.45% | 6.45% | 6.45% | 6.45% | 6.45% |
| 18 months | 6.75% | 6.60% | 6.65% | 6.69% | 6.60% | 6.69% |
| 2 years | 6.70% | 6.70% | 6.69% | 6.69% | 6.69% | 6.69% |
| 3 years | 7.15% | 7.10% | 7.10% | 7.09% | 7.10% | 7.10% |
| 4 years | 7.50% | 7.45% | 7.45% | 7.45% | 7.45% | 7.45% |
| 5 years | 7.80% | 7.75% | 7.70% | 7.70% | 7.70% | 7.75% |
| Floating | 6.49% | 6.25% | 6.20% | 6.15% | 6.24% | 6.74% |
Breakeven (Implied Future Interest Rate) Table
Read about what this is, and how to use it, in my first post
Falls in the longer-term rates have probably got a lot of you thinking about fixing now, but remember the market has already ‘priced in’ its consensus opinion about what will happen to floating rates between now and then.
Any changes in this caused by shifting sentiments in the interim are inaccessible to your average retail borrower.
| Borrow For | Now | in 6 months | in 1 year | in 18 months | in 2 years |
|---|---|---|---|---|---|
| Floating | 6.35% | ||||
| 6 months | 6.33% | 6.59% | 7.08% | 6.78% | 7.73% |
| 1 year | 6.46% | 6.83% | 6.93% | 7.26% | 7.94% |
| 18 months | 6.66% | 6.82% | 7.20% | 7.55% | 8.07% |
| 2 years | 6.69% | 7.04% | 7.43% | 7.75% | 8.23% |
| 3 years | 7.11% | 7.44% | 7.79% | 8.06% | 8.43% |
| 4 years | 7.46% | 7.76% | 8.05% | ||
| 5 years | 7.73% |
From the banks
BNZ (http://bnz.co.nz/binaries/w260810.pdf):
“For New Zealand the relevance of this growing concern about global growth is reductions in long term
borrowing costs which have led to cuts in bank fixed housing interest rates with probably more to come in
the near future. Prospects for the pace of NZ monetary policy tightening have also changed with the RBNZ
now more and more likely to take a decent pause after only two cash rate increases.”
“No-one on the planet has a reliable model which tells us what is likely to happen with business and consumer willingness to spend, borrow, hire etc. and their tolerance of interest rates and desire to get debt down coming out of a near depression scenario.”
Unfortunately, economists’ models are rather unreliable even in the best of times 
Of course predicted outcomes from models are a matter of probabilities, it’s just that the things which cause the less probable outcomes (economic shocks) are themselves unpredictable.
Most importantly for you and your mortgage:
“borrowers probably still have time on their side to float before jumping into fixed”
NZX also has a good round-up of the banks’ views (http://www.nzx.com/news/4073429/Banks-at-odds-over-fixed-v-floating-rates)
“Economists are divided as to whether mortgage holders on floating rates should start moving off now or hold off until the end of the year.”
I’ve said it a few times, and I’ll say it again: the fix/float decision is always finely balanced - if it were obvious what to do everyone would do it, and in so doing would change interest rates which would eliminate any advantage from that action. Forget any idea of beating the market, if you can’t afford to gamble on an outcome you’ll only gain marginally from at best you should be prudent and fix.
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