New Zealand swap rates surged higher again on Wednesday. The drive up is not relenting.
This will have strong implications for fixed home loan interest rates - even though they have just moved higher already over the past week.
But Wednesday's wholesale jumps clearly mean more rises are on their way.
To put the rises in perspective, wholesale swap rates already had the increase priced in at the Reserve Bank Official Cash Rate increase on October 6. After that until the surprising high New Zealand Consumers Price Index number, the one year swap rose +13 basis points on the indication the RBNZ was committed to more hikes. The two year swap rose +25 bps, and the three years by a similar amount over those 12 days.
Then the surprise CPI result generated a sharp jump, which until today (another 9 days) caused the 1 year swap to rise a further +25 bps, the two year by +10 bps and the three year by +15 bps.
Now, today alone, the one year swap is up yet another +10 bps, the two year by +12 bps and the three year by yet another +14 bps.
Local market demand is being fueled by self-fulfilling forces as borrowers rush to fix at current levels. But now, the Aussie third quarter CPI data came in higher than expected, especially the core CPI. Further, giant grocery retailer Woolworths flagged unrelenting cost pressure coming through their system which will be passed on.
Let's face it, if the supermarket buyers can't avoid cost increases, no-one will have the power to resist. And this is just adding fuel to the fire of CPI and interest rate rise expectations.
The bottom line: brace yourself for more chunky fixed rate home loan rate increases, and soon.
(And term deposits rates will also follow up, perhaps with a lag.)
Daily swap rates
Select chart tabs
78 Comments
The 10 year rate is 2.7%
The 2 year rate is 2.17%
Can we really call that steep on moderate outright yield quotes?
The CPI is 4.9%, putting real rates in negative territory- hardly a harbinger of exceptional monetary based inflation.
The US IR 2yr vs 10yr swap spread is currently 102 bps.
True. I have a very simple question to all those who think like that. How do they think money is made? What is productivity?
Selling same house again and again at a higher price every year is not productivity and it's not how money is generated.
Hard work makes money and there cannot be short cuts in hard work. If you short cut that, you pay for it tomorrow one way or the other.
Interest commenters I find are a bit more rational about it. Stuff comments, however, are not. They seem to think they are the victim that RBNZ (or the banks) have targeted. One chap, who was unable to find work, was outraged that this could bankrupt him. He seemed to think 30% plus gains were normal now, as we're ultra low rates, and that's how he would make a living. And these rising rates were taking away his chance to make a living. The entitlement is astounding.
I'm not sure if I am one of the commentators you are referring to. I certainly don't expect that interest rates will be sub 2% for the next 30 years, however!
However, I am much more bearish on interest rates than most here, that's for sure. The reason is not cognitive dissonance, or vested interest in maintaining low interest rates (I could easily handle a mortgage rate of 4%+). And I would actually like to see this stupid and destructive housing bubble crashed.
Rather, it's a view informed by recent RBNZ and government behaviour, which suggests they will do everything they can to avoid bursting said house bubble.
So I put this to you and others who think the OCR will be raised aggressively in the coming year - why do you think this will be done, when it would crash the housing market and the economy, and flies in the face of the RBNZ's recent practice? And remembering that their mandate includes financial stability and employment.
I just can't see it happening, for those reasons.
But keen to hear responses to my opinion, and why I might be wrong.
Actually, higher inflation forces mortgage holders, and anyone else, to spend more of their Disposable Income on necessities. It doesn't matter if they have a healthy cashflow or not.
The hope is that Wage Rises eventuate to 'pay down the debt' faster.
They had better. Because if they don't, we are in more trouble than we want to contemplate.
“The hope is that Wage Rises eventuate to 'pay down the debt' faster.”
Umm, wages go up….
The cost of “stuff” goes up to finance the increase in wages.
But we still have to pay down debt even though our wages are being sucked up by higher costing “stuff”.
Ok, new plan…. I’m gunna stop buying “stuff” and just pay my debt down….
How does that play out…
Maybe rely on renters to buy "stuff"?
Precisely. Any Wage Rises that MAY come are likely to get sucked up by the Cost of Living - in its most basic of senses.
Snapper, today, cost me $49-50 per kilo. Perhaps 18 months ago, I paid $32. So. Do fish-eater buy less fish, and use any wage rise to 'pay off the mortgage', or do they pay $49-50 a kilo? My suggestion is that they will probably drop to Terakihi and still pay no more than the minimum off the mortgage.
Higher mortgage rates are unlikely to encourage people to pay off debt any faster than they do today. In fact what may happen is.....they extend the term of their debt to allow them to 'pay less' each week to meet the rising costs they have to pay.
Perhaps the market is still functioning beneath the collective psychosis of the crowd? Expect auction sales rates to grind to a halt as the herd gets wind. Smart vendors will meet the market at the start of the retreat. I think we're about to see just how quickly greed transitions to fear.
There will always be buyers, but it’s the market price that I’m interested in. There’s no way that stays at current levels as rates skyrocket. And I’m not talking about a reduction in the rate of price growth, which seems to be the limit in the minds of most economists, still licking the wounds of forecast embarrassment.
I would agree, except I don’t expect sanity any more. Kiwi investors will spray money from every orifice in the direction of real estate, even if real returns are deeply negative and interest rates at 30%. It’s religious now. They won’t stop short of bankruptcy. In fact, I expect an acceleration in inflows and prices that will retrospectively justify current stupid valuations. It’s like Tesla.
Most property investors are investors in property cos their neighbours, or mates or family are. There are some professionals, obviously, with a focus on long term value add, that positively gear their properties. But they are few and far between.
The reason that people invest in property in NZ is primarily that we are more or less un-educated and property is seen as 'the' investment by default as no one understands or can be bothered understanding anything else.
This creates an artificial market that is driving up prices and hurting society purely as a result of our combined ignorance.
I do have a small mortgage, maybe 300k, and locked it in for five years last week at 3.8% for five years. Happy with the decision.
Looks like it will get a big ugly from here on in, with five-year rates already at 5.34%. Wouldn't be surprised to see them in the 7-10% range in the next few years. After all, that is what the banks based their stress tests on. Why would they do it if they think it would never happen ?
Not out of the ordinary if you bought your first house ten years ago for $500k - which is the problem, people think the growth in vales mean they can get rich by making only the minimum mortgage payment. Obviously worked in the past, but risky business going forward
Quite interesting. We're just basing off their projected track, but the RBNZ have been very quiet. Apart from their October announcement, there have been precious few of the usual speaking engagements and other media jawboning.
With current data, they basically have to follow through on what they've said which is get to 2% in short order. The swaps market has done a lot of the tightening for them - but the curve is super flat from about 2-3 years out. There's a lot of debt out there that prices off mid term swap. The question is whether a 2% OCR is going to be enough? There is a chance markets overshoot and 5 year swaps head into the 4 or 5% range. Then grab the popcorn...
I don't agree with that view. It sends a signal, especially if the RBNZ's messaging signals further increases, which the market reacts to.
I personally think beyond house prices, raising the OCR won't have much impact on inflation anyway.
But bloody heck, saw 91 petrol at $2.70 a litre today in Auckland...glad I don't need to drive much at present.
It's amazing how many remarks are heralding this as the consequence of an inept RBNZ and money printing, and almost no one recognising this as more as the consequence of covid-19 on global trade and economies. The RBNZ isn't making gas $2.70 and effecting our balance of trade.
Spose it's sexier to do some hand wringing.
Only a hop skip and a jump away from talking about precious metals.
Here comes another Weimar Republic.
The recommended cure for an inflationary super-event is a war but only if you are a country that manufactures armaments.
Looking around there are not many large NZ-owned manufacturers remaining to convert into armament manufacturers. Perhaps Hynds Pipes could manufacture mobile missile launchers. Pacific steel could perhaps convert to making shrapnel for artillery shells. But that's about it.
Anybody know of any others?
I don't worry at all about the property investors who have loaded up the debt to buy more and more houses. I worry about the first home buyers who are starting out, taking out huge mortgages just to get into the housing market. Those people will really suffer when interest rates pick up, because they haven't had the time to pay off significant amounts of principle.
On the other hand, the corresponding fall in house prices should make property more affordable for new FHBs, but I feel like those properties will just be swept up by investors with low debt taking advantage of a falling market.
We went through the share market crash in Auckland in 87 & through to 91 in the end. Four long years the value of our property was below what we paid for it. We sat. We prayed. In 95 we sold for a 20% paper profit. F.... it was tough. I was diagnosed with depression & put on the pills. I wouldn't recommend that to anyone.
On that basis, I think the RB will be trying to keep things as low as they can go. Will global inflation ruin the party? Reality always sucks.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.