By Gareth Vaughan
Reserve Bank Governor Alan Bollard might be forgiven a sly smile if he looks at the latest residential mortgage analysis out from the central bank.
Figures released by the Reserve Bank yesterday afternoon show NZ$135.644 billion, or 80.74% of the country's total NZ$168.001 billion worth of home loans were either floating or fixed for a term of less than one year in April. This figure, which excludes NZ$501 million of unallocated mortgages, is a record high percentage since the central bank's series on floating and fixed-term home loans began in June 1998 ahead of 79.85% reached in March.
The percentage of all residential mortgages on floating, or variable, terms has also extended its record high, reaching 52.62% after popping up above 50% for the first time in March. This comes at a time when most banks are offering lower interest rates on floating loans than fixed-term ones and have been for some time. See all bank residential mortgage rates here.
The Reserve Bank's ability to control consumer spending and inflation through Official Cash Rate (OCR) moves is boosted by having more people on floating mortgages. Because the OCR's biggest influence is on short-term interest rates, a hike or cut in the OCR quickly flows through to floating interest rates.
A borrower on a floating mortgage is, for example, generally hit by a 25 basis point hike when the Reserve Bank lifts the OCR by the same amount. This means the borrower is forced to spend more on interest payments, giving them less discretionary money to spend elsewhere.
The OCR is currently at 2.5% with most economists not picking an increase until at least December. The Reserve Bank has said in the past this extra monetary policy power allows it to keep interest rates lower and avoid faster increases.
Of the country's total NZ$168.001 billion worth of residential mortgages (excluding the unallocated), NZ$88.397 billion was floating as of April and NZ$47.247 billion worth fixed but due to roll over within 12 months.
The low according to the central bank's data, in terms both of home loans floating and fixed but up for renewal within 12 months, was 37.5% in June 2007.
The April Reserve Bank data shows NZ$23.774 billion worth of home loans fixed for between one and two years, NZ$6.697 billion for between two and three years, NZ$1.348 billion for between three and four years, NZ$460 million for four to five years and NZ$77 million for more than five years.
'We're going to feel it really quickly'
The Reserve Bank's record 'potency' caught the attention of NZIER principal economist Shamubeel Eaqub.
“Over the next couple of years the Reserve Bank is going to get quite a bit of help from two things. Number one is the core funding ratio goes up again, so that will give them a bit more traction in terms of how much mortgage rates are," Eaqub said in a speech in Wellington on Wednesday afternoon.
"But also there’s been this massive increase in people going onto floating and short-term mortgages. We’re talking really massive here. Almost 80% of all mortgages by value are short-term – either floating or expiring in the next 12 months. When the Reserve Bank raises interest rates, we’re going to feel it really, really quickly," Eaqub said.
"This is a real turnaround from what we had in the 2006/07 period, when the Reserve Bank was trying to raise interest rates, but it just had no traction because most people were on fixed. This I think is going to be a very, very powerful driver," he said.
"Even though we’ve been talking about households starting to save more, the actual stock of debt hasn’t really come down – not much, debt growth has been very, very small, but it’s still been growing. So it’s going to be passed onto consumers very, very quickly and it will have an impact in terms of subduing demand.
"So we think the Reserve Bank doesn’t have to raise interest rates that much to have the kind of powerful impact to curb some of those inflation pressures that are building in the economy."
(Updates with NZIER comments)
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27 Comments
The real question is whether people dopped their repayment when they came off fixed or maintained the repayments at the old rate. If most maintained the repayments the effect of an interest rate rise will be a decrease in capital repayments with little effect on consumption.
The lack of increase in consumption over the last year as interest rates dropped would tend to indicate people maintained their repayments. Is their any way to find out what % of loans are being repaid at a higher than table repayment rate? I suspect the banks wouldn't be too keen to publish this data.
Now is the time to phase out the use of fixed loans so that the price signal in the OCR regime is decorrupted permanently, ready for when the RB needs to tighten.
If this idea was accepted and implementation completed, would RB need to increase rates sooner or later, with or without it?
Would the OCR have to go as high in the next tightening phase with, or without the idea implemented?
Sounds like a sight test ...
So would this make things better or worse, for borrowers and NZ as a whole?
See the dots yet?
Cheers, Les.
Are u joking Les...?????
u are suggesting that we legislate so people have no ability to mitigate risk...???? just for the sake of reserve bank policy..??
Why not just have a command economy...where the powers that be simply tell us when..how..and where to buy houses...????... and when we have to spend..????
The OCR regime is corrupted because it is a flawed model in the first place.....
Do u trust banks...????? Do u trust Central banks..???? ( are they our friends )
Bollard can and will raise the OCR to whatever he wants... in the blink of an eye....in the name of "macro economic monetary policy".... ( without regard to peoples struggle to make ends meet )... ( Central banks are heartless )
Do u think he cares if my mortgage repayments go up 20%....?????
AND ... u want people to be completley vulnerable to his ability to do this..????
Cheers Roelof
Roelof - "command econmy", no, this idea is closer to free market principles than without the idea - the price signal is not corrupted with a lag caused by fixed rates. All would feel the effect faster and respond accordingly.
"no ability to mitigate risk" - no probelm - take on less debt. Consider the recent housing boom - sorry, I mean credit boom - would the following have been greater or lesser, with the idea in place:
1) personal debt.
2) national debt.
3) debt servicing costs.
4) house/land prices.
5) housing/land affordability.
6) OCR peak.
7) whinges and whines about banks break fees from fixed rate loans early 2009. (It cuts both ways.)
8) NZD.
Your point about Alan B and raising rates in the blink of an eye; with better control of inflation why would he need to behave that way? In any case have you seen past behaviour that corroborates your supposition?
Another idea, instead of abolishing fixed rates, allow the RB the facility to vary the principle repayment rate (PRR) of loans, as a supplementary instrument to the OCR. This insulates borrowers from ex-NZ aberattions, but not sovereign monetary policy. Monies would be held on account and released at roll-over. One could pay down debt, do whatever, their choice. But note, they would actually have that choice because said money held on account is still theirs - not Peter Dunne's (if we went for some sort of supplementary tax) or bank shareholders.
Cheers, Les.
Les.... I don't really know where to start.... I think we are miles apart in our underlying economic/monetary philosophies... ...
I believe that the monetary aggregates are important.
I believe that if a Central Bank allows money supply to grow at double digit rates... or even at rates markedly above GDP growth rates, ... then it is being negligent.... and that excessive monetary growth leads to bubbles, malinvestment, speculation, overconsumption...and other distortionary manifestations...
Money supply growth is a result of growing demand for credit... It is totally elastic... (endogenous).... (BUT... only becauces that is the Central banks current, fashionable model, that they believe in )
Central Banks "influence" the demand for credit by raising or lowering the OCR which influences short term interest rates.
Central banks don't have that much influence over long term interest rates.
Do you think this is a pretty loose and slack way for a Central Bank to manage the money supply...????..... Especially in a Global world where Banks and even Corporates can borrow large amounts of money at very cheap rates offshore..
Notice that I have not mentioned the word "inflation"... or the "CPI "....
If it was your job to fill a tank with water...and keep filling it until the "gauge" got to a certain level... BUT the gauge was faulty.... what would u do..... U would keep filling the tank...
What if the faulty gauge was the CPI....and the water was money ....
The CPI is faulty because of the extreme deflationary forces of Globalization..... ( very difficult to increase prices and wages )
(In a normal closed economy we would have had hyperinflation with the level of money supply growth that the Reserve Bank has allowed.)
BUT ... in the Global world .. the Reserve Bank has been adjusting Monetary Policy to a faulty gauge... ( Now we are starting to hear whispers that the monetary aggregates might be worth watching )... (AND the whole inflation targeting thru the OCR is a questionable model )
This brings me to your suggestions... I don't like them
The reserve bank should simply manage the money supply... and only allow it to grow at moderate levels.. They should not overly influence the demand for credit... They should allow the market to do that...
The market would do that thru interest rates.... Interest rates would balance savers/borrowers.
As part of managing the money supply the Reserve Bank would have to limit/ manage the amount of foriegn Capital that comes into NZ.. ( Countries like Brazil are moving towards this ).
Part of all this would also be the necessity of removing the fiscal distortions that make Savings the sad distant cousin to property...as an investment.
So.... Les.... not really answers to your questions... but a completley different point of view.
here is a link to a Richard Duncan interview.... he is on my wavelength.. but much, much smarter than me...
cheers Roelof
Roelof - you may not have answered my questions, however, thanks for this, useful.
We are not miles apart, I'd like to see more attention given to aggregates, I mean money supply, I mean debt, and I'd be keen on RB limiting inbound foreign funds too, possibly by specifying and varying a maximum % banks can use. Which means I don't see one 'silver bullet' for this issue, my abolishing fixed rates thing, or whatever - it needs a multi-solution approach - but that is the reverse of where inflation targeting has failed.
It has failed to adequately control money supply inflation, I mean debt growth. Sure with the cak-handed way we deal with the CPI, OCR and PTA, we've have had domestic price stability - the target. But at what cost to the tradeables sector? What of the instability risks we face because of over inflated debt growth?
So as for targeting - great shooting, RB hit the PTA target, but other threats should have been targeted - and RB didn't even aim at them, nevermind deal to them. Why?
Dismal.
Cheers, Les.
With a positive yield curve likely to continue for some time (no cheap fixed term money from offshore) why shouldn't a home owner pay a premium for a fixed rate for the certianity it provides?
Same reason someone places funds on term investment rather than keeping in savings account?
As well Banks are making a higher margin on flaoting rate mortgages vs fixed where the margin is set for the period of the fixed term.
Les, I'll get back to you on your SGD questions, but your suggestion above again confirms to me that you place far too much faith in the RBNZ abilities, be it an ability to manage FX rates, or to know exactly how the inflation outlook will pan out - they've got the wrong occassionally in the past, like most central banks, and have had to sky rocket the cash rate higher to fix the problem e.g. 9.20% in 2008 which took floating mortageg rates well above 10%.
Frankly at times when I feel that they are behind the curve with the OCR I might want to go protect myself from the inevitable spike in rates before they realise their mistake and crucify me (now might be one of the ocassions developing, who knows). Further, some borrowers may be able to survive the cycle but other more higher geared may not - they deserve the option of being able to protect themselves. To answer your question, far far worse.
Grant - I wish you would use the reply facility on a comment, I'd have missed this if it'd not been for Roelof's reply to another comment of mine on this thread. Anyway, see what I've said to Roelof at 02 Jun 11, 10:28am.
With less lag in the feedback-loop in the OCR regime and therefore tighter control of inflation, errors in forecasting become less consequential. Inflation would vary less and forecasting would be more precise.
As for their ability to manage FX rate, as I said I agree, under the present system. Change the system and approach, and they could intervene with more confidence. However, tigher control of non-tradeables (a range of ideas around, not just this abolishing fixed rates thing) would help and implementing a such system chnages would be the first step. If they did OCR could come down and with it ....
Cheers, Les.
So should you keep floating? Or start getting ready to fix a loan portion at 2 years? Research shows that floating is the best deal over life of home loan. Trouble is 6.4 is a lot higher than 5.7. If rates start rising in 2012 then you be caught in 2013 coming off fixed anyway.
Mortgage Belt - the answer to that question is how can your situation handle potentially having to pay a 10% floating rate for a period ? It would cripple many and for someone in that situation they should defintely be looking to lock into fixed rates fairly soon. However, I would seriously question 2 years as there's arguably little value in them with a large percentage of that period being when the OCR will likely remain at current levels until year end - 3 years minimum in my book, and possibly a component out to 5 years
Remember, NZ has negative interest rates at the moment, something rarely seen, and something that greed doesn't want to see.
Such a large proportion means it is less likely that interest rates will take off too quickly, as each interest rate rise will pack more punch than in previous when more loans were fixed.
Roelof: Les's suggestion has so many shortcomings, that it can safely be ignored.
Morning Tim, I've deleted those erroneous postings for you.
Sometimes if the comment takes a long time to save (either slow connection at your end or a hiccup with the server at ours), people push the save button a couple of times, which generates multiple comments.
No worries though
Cheers
Cheers
Cheers
Cheers
:)
Alex
The "power" is an illusion....Bollard is like a great hunter facing down a charging Bull Elephant...and he's armed with a custard pie.
Ask him how much good this huge % of floating mortgages, will be when the shite in the piigs and in the usa and in the uk and in Japan...slams into the bond markets....
Are we seriously to believe the various lying reserve banks can go on feeding loot to the private banks to buy govt bonds to feed the demand for debt financing on earlier bond issues that raised money which was wasted on stupid rubbish by idiot govts....the private hedge funds have woken up as did PIMCO and they are saying get stuffed.....
He cant raise the OCR....if this happens.....if he does he's signing the death warrant of the NZ economy....
The EU's problems are not NZ's problems, directly amyway. So when it goes pear shaped the NZ OCR will drop to something silly like 0.25%....
I dont believe it, no, PIMCO I take as a serious indication that playing the game right now is really silly.
regards
With you on that, Wolly. Don Brash and Owen McShane were right 20 years ago, that land supply restrictions alone, rendered monetary policy impotent.
This is slowly entering mainstream thinking now, in OECD reports and academic papers and so on. Don and Owen deserve some sort of prize, i reckon.
Land policy was and is at best a bit player.....what renders Monetary Policy impotent is expensive energy....nothing else compares...or matters....
I see you have joined the "if we keep repeating it often enough in blogs and news groups someone might believe it brigade"....OECD isnt mainstrem thought, its disconnected right wing failed mantra.....
Don the failure was put out to pasture, he should have stayed there....
Owne McShane, well this seems to be a classic piece of his,
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10120491
"Oil is only one source of energy. If it gets truly expensive, the future will still be awash with energy because so many new sources are waiting in the wings for oil to get more expensive. New energy sources are all around us."
He hasnt a clue.....biggest thing is our entire global economy is based on cheap energy....it cant survive expensive energy as is....we will indeed be back on trains, or walking....most of the energy we use is for transportation, if nothing else the most viable alternatives are not directly transport fuels.
Oh look the same failed growth mantra.....
"The average household income for the Auckland region is about $66,000 a year. After 100 years’ gross domestic product growth at, say, 3 per cent a year, that income will be more than $1 million a year. The average household could afford to pay $30 a litre to fill the tank."
This is the level of his maths? you have got to be kidding.
regards
Owen McShane, Don Brash and I understand economics. Steven does not. He is nothing more than a time-wasting troll on this forum.
I am not going to waste any more time explaining capital formation, investment, resource substitution, rebound effects, etc etc etc. His type have always been wrong. They have also ALWAYS assured us that "THIS time we're right". They will STILL be telling us this, as long as we and they are alive. They will die, certain that they would have been proved right if only they had lived another year or 2.
150 years ago, it was lack of space to grow horse feed; and the rising problem of urban horse excrement. It was also a diminishing supply of whale oil. Enterprise, technology, and free markets have a lot MORE OBVIOUS opportunity of solving our current seeming dilemmas than they had back then.
THIS sort of thing arrives in my inbox almost every day:
http://oilprice.com/Energy/Energy-General/Thorium-A-Cheap-Clean-and-Saf…
That's just the latest random example.
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