Latest Reserve Bank figures indicate that New Zealand's home owner-occupiers appear to be betting that interest rates will start coming down again sooner rather than later

We were short and it became a problem. So we went long. But now we want to be short again. Or so it appears.

New Zealand's home owner/occupiers were rather caught out when interest rates began to spike in around the middle of 2021.

It's not so long ago that interest rates only seemed to go down, and down, and down. And by the middle of 2021 a lot of people appeared to be still banking on that and were 'short' with their fixed mortgages.

So, when interest rates started to surge upwards again, many felt the pain quite quickly.

But, credit where it is due, upon refixing a fair few home owners went for longer mortgage terms.

Now, however, we are seeing that situation reverse again - and the trend is for shorter terms once more, presumably with the punters assuming that interest rates will start coming down again sooner or later.

Whether that does come to pass depends on the Reserve Bank and its view of whether inflation is under control or not - something that we should learn more about over coming weeks.

In the meantime it’s very interesting to view the various monthly data sets that the RBNZ is now producing that highlight the mortgage preferences of Kiwi home owners.

I'm focusing on the figures for the owner-occupiers.

One of the often pointed out facts in 2021 when the Reserve Bank started hiking the Official Cash Rate from the pandemic-low of 0.25% to the current 5.5% was that the RBNZ would get a lot of 'bang for its buck' quickly because of how 'short' many owner occupiers were with their fixed mortgage terms.

The RBNZ started lifting the OCR in October 2021, but mortgage rate rises actually started before that in response particularly to the June quarter 2021 Consumers Price Index (CPI) inflation figures, which showed that inflation had set on fire, the annual rate jumping to 3.3% from just 1.5% in the March quarter and on its way to a peak rate of 7.3% in June 2022.

If we take July 2021 as a starting point for when interest rates started climbing, we can see that according to the RBNZ's S33 mortgage data series owner-occupiers had $201.657 billion worth of mortgages on fixed terms, of which some 72.6% ($146.409 billion) was for one year or under. Hence the reasoning that the RBNZ would get some quick 'bang for its buck' as rate rises would soon be felt by large numbers of people.

But Kiwis are nothing if not adaptive. By November of 2021 the percentage of fixed mortgages on terms of a year or less had reduced markedly to 59.5%.

By July 2022 this percentage was down even further to 48.2%. In other words over half the fixed, owner-occupier mortgage holders had more than  a year to run on their mortgages at this rate.

But having decided that 'longer is better' for the fixing term, when do you then decide to start heading back in the other direction, and go 'shorter' in anticipation that rates will come down.

Well, this thinking seems to have gradually kicked in during the latter part of 2022. By November of that year some 53.1% of owner-occupier fixed mortgages were for a year or less. Then by July 2023 this was up to 57.7% and by November - the latest figures available - back up to 60.1%

So, the majority of people are now presumably thinking that the 'end is in sight' and rates are going to come back down.

The RBNZ's S33 mortgage data is great for seeing the 'big picture' of how many people still have certain amounts of time to run on fixed terms - but it doesn't tell us about the most recent preferences in terms of fixing.

That's provided by the series that the RBNZ introduced during 2023, the C71 data series, which details mortgages as they are actually drawn down and for what terms they are fixed for. Sadly the information is backdated only as far as April 2021, but it's been interesting to see how much the preferences do change month by month - something clearly influenced by 'specials' that the banks are pushing at various times.

At the very start of that series in April 2021, the most popular fixed term for the owner-occupiers was by a long way the one-year term, with 57% of the mortgage money drawn down that month for a one-year term. That's the high point in the whole series to date for the one-year term period.

But interestingly, back in April 2021 the five year terms took 9.7% of the monies advanced - which is the highest level for the five year terms in the short history of the data series. Clearly there were a few people who could see the writing on the wall for the low interest rates that were prevailing at the time. At this point it's looking like a pretty good call to have gone long at that stage.

What about now though?

Well, as said further up, the initial flurry of interest rate rises in 2021 prompted home owners to go longer with their fixed terms.

Now, however, as people assess the prospect of maybe some interest rate relief this year, then shorter terms are featuring more.

Of interest is the fact that among new mortgages drawn down in November 2023, the six-month fixed terms enjoyed their highest percentage share since the data series began with 6.6%. The one-year term attracted 31.8%, but two year terms appear on the way down with a 25.6% share, that's a long way below the series high share of 44.7% that this term had back in July 2022.

While the super-short six month term is suddenly finding some popularity, another interesting development in the past 12 months has been the rise of the previously unfashionable 18-month term. In November some 21.3% of mortgage money was on that term, which is just shy of its series-high figure of 22.5% recorded in April 2023. Before the last 12 months the 18-month term had not previously hit 10%.

As a general observation, I'm quite impressed how nimble the Kiwi owner-occupiers are when it comes to looking for the best deal at the appropriate time.

With over 60% and probably still rising of total owner-occupier fixed mortgage money fixed for a year or less, mortgage holders will be in a good place to quickly enjoy rates coming down again.

Er, assuming that's what happens...

The potential spanner in the works would be if inflation starts to stay stubbornly high.

We'll find that out as the year goes on.

At the moment it seems likely that people will continue to bet on rates coming down sooner rather than later.