The next OCR review is on February 19, 2025, about five+ weeks away.
Financial markets are pricing in a -50 bps rate cut then, which would take the Official Cash Rate (OCR) down to 3.75%.
If that in fact happens, almost certainly, floating mortgage rates will fall then by a similar amount. And that would take them back to about 6.9%.
But what will fixed rates do? Short term mortgage rates like the 6 month fixed will likely fall too. Maybe not the whole -50 bps, but much of it. But it is much less certain that other fixed rates would fall by anything like a -50 bps OCR cut.
Mortgage brokers are out talking their book, raising expectations of big rate cuts ahead for borrowers. But mortgage brokers are hopelessly conflicted here. New mortgage transaction flows are weak because the housing market is weak. Their business model is being shunted into the refinance activity. The way they can keep their fee flows up is to have borrowers make more transaction activity, to fix shorter and more often.
But away from their noise, what are the chances one year or 18 month home loan rates will fall sharply too?
Actually no-one really knows (and anyone who says they do should be treated with scepticism).
But we can read some tea leaves related to the pressure on money markets and bank funding costs - because it is these realities that will give banks the room to move and respond to any competitive pressures.
First, we can look at how the wholesale swap rate market has reacted since the last -50 bps OCR cut on November 27, 2024, taking it down to 4.25%. At that time, the one year swap rate was 3.82%. Today that same rate is 3.53%. So it is only pricing in a -29 bps change. If that held, these wholesale markets are suggesting a -25 bps change is the most banks could 'afford'. There are still five weeks to go, but by now you might have thought the OCR signals would have driven more of a swap market change.
And the reason the swap change is limited probably has a lot to do with the new upward direction at the long end of the rate curve. That is an international trend. Long term money is getting more expensive.
Banks fund their operations from local and international sources, so the international pressures are real for them. However, most of their funding is from domestic customer deposits. And New Zealand customers like to keep their deposit terms short, in fact very short.
But banks lend long, mainly for mortgages.
So bank treasurers who have to manage this mismatch need to get their long term funding from sources that will supply that. And they are mostly overseas. And long term yields and funding costs are rising there, so they won't be lending to our banks at lower rates than they can get elsewhere. In fact, they will probably need a premium to lend to 'New Zealand'. None of this argues for lower rates ...
... unless you believe banks will force their depositors to accept less, in the same proportion that the OCR might fall.
But banks are constrained by regulation. It's a simplification, yes, but it is true enough; the Core Funding Ratio limits how much bank funding can shift away from local depositors. Banks need that depositor funding base and can ill-afford to have any meaningful leakage of depositor support.
Furthermore, an increasing share of depositor funding is coming from term deposits, the expensive end of this source.
So, the depositor funding is shifting to the higher-cost term deposit category. And the wholesale funding banks must raise to bridge the gap between their lending book and their depositor funding will largely come from offshore for the longer term tenors, which are also rising in cost.
None of this argues for big cuts available for lower fixed home loan rates. Competition for market share might allow some small -10 or -20 bps home loan rate cuts. But banks would have to reject their shareholder return expectations to go more than that even with a -50 bps OCR cut. What do you think are the chances of that? Maybe Kiwibank, who has a shareholder who until now has not wanted market returns, might be a candidate. But with the recent expectation on the Kiwibank board to raise capital in "the market", it seems unlikely they will have the funding or tolerance for low returns. New market pressures are about to influence Kiwibank, even requiring them to start earning overall returns "like the others".
It is hard to envisage a 2025 where fixed home loan rates can fall much further than say the low 5% level. Long rates are probably going up on the Trump Effect. Short rates probably can't follow the OCR down.
Of course time will tell. We are not making any predictions, only reading the tea leaves as they swirl in January.
Yes, you may have home loan rate decisions to make. Your guess though will be as good as anyone else's - and probably better than that mortgage broker who says for certain they know what is going on. (They may be registered with the FMA, but interest rate forecasting skill is not a factor in that registration.) There are two types on mortgage brokers - 'hunters' and 'farmers'. Their compensation isn't regulated in the same way banks employees are restrained, so while that dodgy bank 'recommendation' behaviour (tied to their pay) has been regulated away, it has just moved over to mortgage brokers. Buyer beware. The confliction is real.
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25 Comments
look overseas as mortgage rates aren't declining at all and now that your term deposits will be insured from other institutions by mid year I doubt the banks will offer substantial cuts in term deposit rates as now there will be more competition so I see less rate cuts coming for 2025 maybe a small increase, which should lead for more house price declines.
Not just "not declining" but going back up. US mortgage rates are back at June 2024 levels (7%) despite three Fed rate cuts since then.
https://finance.yahoo.com/news/mortgage-rates-jump-again-approaching-7-…
Mortgage brokers are the used car like/finance industry slimey salesman, that look to hook the NZ Ponzi Debt Junkies into forever bigger DDDEBT.
- The home buyers that think they are their friends, are not paying attention.
These brokers see gumby FHBs especially, as useful idiots who are just donkey/mules to enable their fat commissions.......
It's very much buyer beware, as the above author espouses.
Mortgage brokers, like other REA industry miscreants, seek to nefariously "Coach and Cajole" the novice first home buyers into as much debt as they can handle on a "fine day" in economic terms.
MANY FHBs now have been caught out in the current property crash and some have had to ditch property at massive losses from 2019 to 2022 purchase prices, such as is occurring in this currently unfolding property crash.
When these poor debt loaded sops, hit these economicly stormy rocks, the previous mortgage broker could not care less and is gone like a fart in the wind.
Now any interest rate first aid bandage, to stem the NZ housing ponzi gaping wound, home equity blood loss, would need mortgages written with a 3% handle, otherwise further house price declines are baked in the cake for 2025/2026.
Buyers beware and only make offers in the 2015 to 2018 value range.
REAs and Mortgage brokers won't advise this, but as we all know, they are hopelessly conflicted.
Sure Mr Painter, whatever successfully refloats your Ponzi-Deep addicted boat:)
BTW - Are you scoping to become an REA or mortgage broke? if your current gig does not pan out?
The WORLD is now fully HFL for interest rates. Little, skinny kid NZ, cannot be duffrant.
- Its Buyer Beware, at every turn.
There's a potentiality for rates to stay high given the relatively small movements in unemployment and weak economic growth. With the buffer remaining until if/when there's a larger crisis to stimulate an economy through.
If it really were heading towards higher rates than now for a protracted period, silly notions about buying a house for *insert year* prices are somewhat irrelevant.
My gigs are looking pretty good thanks. I keep waiting for the sky to fall, in the meantime actual demand only seems to increase, and I'm trying to use the surplus wisely.
Maybe if I thought in capital letters more my disposition would be less sunny.
Great article, David. Mortgage rates seem to have limited downside potential, even with another OCR cut. I'll be keeping an eye on the short end of the yield curve. In the US and UK, the short end is climbing higher, with the 10-year yield only about 30 basis points above the 2-year. Meanwhile, the NZ 2-year yield is 90bps lower than the NZ 10-year. Are markets pricing in another rate cut? If a cut doesn’t happen, could we expect the 2-year yield to move higher? I’m curious to understand why our spread is larger compared to the US (~30bps), UK (~30bps), Canada (~40bps), and Australia (~60bps).
Perhaps the way the market is viewing it is that the recession is going to be worse here in the short term (ie our economic position is much weaker) - requiring lower short term rates than the other countries mentioned. Or it could be a mystery of finance that we will never know the answer to.
Where is the extra return to come from?....increased Government spending?....not looking likely in the current environment. Perhaps it will come from private investment in infrastructure?....that will take time and require an increase in incomes. Maybe we will pay less offshore for our inputs?....everyone else will be hoping the same.
Options are disappearing.
No Orr doesn't really, the banks are looking out for themselves and if Orr try's to lead them off a cliff they are not going to follow. I don't see the banks performing any more big cuts anytime soon unless things get incredibly dire. Maybe they will trim the floating and short term fixed rates but they are not going to set themselves up for those really low 5 year fixed terms again that every man and his dog will go for this time around.
I always find the idea of deposits funding loans a bit weird - the deposits are a liability on the banks balance sheets, the loan agreements are the assets. New loans literally create the deposits, which apparently fund the banks?!? But, I have been told it's just a language thing, and economists like to describe the world in reverse terms to keep the workings a mystery, so to the point...
I have banged on previously about how painfully slow the mortgage rate adjustments will be through 2025. Banks will manage the effective mortgage rate down very slowly to maintain net interest margins. After the GFC, the OCR was dropped from 8.25 to 2.5 (mid-2009) and it was more than three years later that the effective (weighted average) mortgage rate dropped below 6%. If you compare the standard offer one-year rate to the OCR over time, you can also see this clearly. We've never had a standard offer one-year fixed rate mortgage below 5% while the OCR has been above 2.5%. Sorry.
Actually, I shouldn't be glib - thie is a really important consideration for the 'low rates will save the economy' crowd. The OCR started its descent in mid-August 2024 but the effective mortgage rate carried on going *up* for the next two months. We will find out next week whether the increase continued into November 2024.
All the signs are that the effective mortgage rate will stay in the low to mid 6s for the foreseeable future and that 1-year fixes will edge down frustratingly slowly (as David outlines above). That means that in aggregate interest payable on mortgages will stay well above $22bn per year for a good while yet (more if we borrow more). That's $10bn higher than two years ago. This effective transfer of money from spenders to savers and bank equity holders (in broadly equal measure) has tanked the economy and reduced aggregate demand (and jtherefore jobs etc). People can talk about the wealth effect and good vibes, but I prefer to look at the hard cash flows... and it is not looking pretty. Remember $22bn is about 1/7th of total NZ wages.
Sadly, the decline in term deposit rates will only drive people into riskier investments, such as the "10% return guaranteed" offered by all the property developers to people scrolling on Facebook. In fact, I'm already seeing it.
Dont hold your breath for the FMA to step in and stop it, as we've seen, they havent bothered to act until its time for a dawn police raid.
"And the reason the swap change is limited probably has a lot to do with the new upward direction at the long end of the rate curve. That is an international trend. Long term money is getting more expensive."
Many involved in the pensions industry will tell you this is because the pensions companies are going shorter to cater for boomers cashing out of their pension funds. Where will boomers put that money? ;-)
Good read, David. Thanks.
Boomers leaving western markets and climate change costs excepted, I don't see anything much that suggests "this time, it's different".
My overall view is that we'll see rates move exactly the same as the last cycles with banks, as they always do, indulging in rocket and feather pricing, and using longer term rates as a way to 'market' shorter term rates higher than they should be.
And, of course, there's always the chance that central banks are indulging in the time honored practice of 'holding too high, for too long' so we get hammered by a global recession that statistically follow periods of rate inversions. A decent recession can see large amounts of money get destroyed. Central banks & governments typically respond by creating new money to replace it ... with interest rates falling hard to get that new money into circulation.
Lots to look forward too, ay? :-)
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