By Gareth Vaughan
The percentage of home loan borrowers with their mortgage on a floating interest rate has risen above 60% for the first time since the Reserve Bank records began in June 1998.
Borrowers are preferring to stay floating despite warnings from bank economists that the Reserve Bank's Official Cash Rate is likely to increase from later this year, potentially pushing up floating mortgage rates. The shift to floating is also flying in the face of slight reductions in fixed rates to levels in line with floating rates. The move also gives the Reserve Bank more monetary policy traction and, ironically, gives it more headroom to leave rates on hold for longer because it can be more confident it will be able to slow the economy faster when it needs to.
The latest monthly figures from the Reserve Bank show NZ$103.761 billion worth of banks' on-balance sheet residential mortgages were floating as of December, comprising almost 61% of the total NZ$170.750 billion.
Another NZ$40.232 billion was fixed for less than a year, meaning NZ$143.993 billion, or 84%, worth of on-balance sheet residential mortgages are either floating or up for renewal during 2012.
The total of on-balance sheet fixed-term mortgages stands at NZ$66.742 billion. According to the central bank's figures, the trading banks hold a total of NZ$281 million worth of residential mortgages off-balance sheet.
Banks cutting fixed-term rates
Confirmation home loan borrowers were still favouring floating mortgages over fixed ones as 2011 ended comes on the heels of recent cuts to fixed-term rates by four banks.
Sister banks ANZ and National, SBS Bank, plus ASB and TSB Bank, recently cut advertised fixed-term home loan rates by up to 30 basis points after wholesale 'swap' interest rates fell following official data that showed the consumer price index fell 0.3% in the December quarter and the Reserve Bank left the Official Cash Rate (OCR) at its record 2.5% low amid economists' expectations it may stay there into 2013.
In contrast, the most recent change to floating mortgage rates came from the BNZ on December 1 last year when it raised its Total Money floating, or variable, rate by 15 basis points to 5.74% from 5.59%.
Late on Wednesday Westpac cut its two-year fixed home loan rate by 10 basis points to 5.79%.See all bank advertised mortgage rates here.
More monetary policy power for the RBNZ?
In theory the large proportion of residential mortgages on floating rates strengthens the Reserve Bank's ability to control consumer spending and inflation through OCR moves. 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. See more on this here.
However, some of the big banks are increasingly arguing that the floating mortgage rates they charge customers are "decoupled" from the OCR, especially with the Eurozone sovereign debt crisis driving up the cost for them of raising money in overseas wholesale markets.
For example, BNZ yesterday issued a €500 million worth of three-year covered bonds, secured by New Zealand residential mortgages, to European institutional investors at 113 basis points over the euro mid-swap rate. That's well up on the 62 basis points over swap the same bank paid in a seven-year, €1 billion covered bond issue in November 2010. These figures don't include the cost of converting the money from euros back to New Zealand dollars.
'Decoupled'
BNZ CEO Andrew Thorburn told interest.co.nz last October the OCR and banks' floating mortgage rates had never been coupled and there was the "real possibility" floating rates would be hiked, independent of any OCR move, because of the banks' own rising funding costs. And yesterday Cameron Clyne, the CEO of BNZ's parent National Australia Bank, said NAB may not pass on any official interest rate cut made by the Reserve Bank of Australia next week to customers in full because "there's no correlation to what the Reserve Bank does and the cost of our funds."
Also in Australia, the ANZ Banking Group recently moved to review housing and small business floating interest rates monthly independent of Reserve Bank of Australia OCR reviews. Although New Zealand subsidiary, ANZ New Zealand, hasn't followed its parent's lead, a spokeswoman for the bank told interest.co.nz.
ANZ NZ agrees with its parent's view that interest rate considerations for banks include many factors other than just the Reserve Bank’s OCR.
This push by some of the banks to separate the OCR from the floating interest rates they charge customers comes after a strong year of profits for the big four Australasian banks - ANZ, NAB, ASB's parent Commonwealth Bank of Australia and Westpac. Combined, the big four made a record A$25 billion of annual cash profit in their last financial year, with their New Zealand subsidiaries making a combined net profit after tax of NZ$2.778 billion. That's NZ$78 million, or 3%, higher than their combined profit in the boom year of 2007 when double digit lending growth was the norm compared with more recent anaemic lending growth.
In New Zealand ANZ, ASB, BNZ and Westpac all recorded annual rises in net interest margins, up 11, 40, 14, and 22 basis points, respectively. The Reserve Bank monitors banks' net interest margins on a monthly basis and the results can be viewed here.
19 Comments
And then you have the unknown....a credit crisis across the world triggered by the default of Greece Portugal and Spain , followed by Italy...couldn't happen right?....bollocks it couldn't...and it would mean an overnight leap in the floating rate as banks rushed to harvest the loot...people running between banks to grab the diminishing fixed term offers..all gone inside a couple of days....
Then it's hello to the unknown...the full scale shite splattering up the wall end of the credit based economic farce that is the NZ economy....go figure out the impact on the already deep fiscal hole, of countless families slashing the spending across all stuff...not for a week or a month but for years and years.....
So what you ask....so there you see the folly of building an economy on cheap credit borrowed offshore....the madness of allowing the banks to dope the public and media into believing credit is good for growth....
Problem is with fixing currently: the tempting rates are for 12 months - it may be riskier fixing now for 12 months with no flexibility to re-fix over the 12 months if rates start moving up. At least floating you can fix with a quick phone call - at most missing the first hike....
If you're fixing for risk elimination - then might as well go for 3-5 years. If you're fixing for short term rate reduction then 12-18 months....
Adjustable mortgage = Desperate Measures for Desperate times for desperate borrowers, for hopelessly un-payable debts.
My prediction for strategic foreclosures still stands. It's likely happening now, just hasn't made the news, yet. Adjustable rate mortgages are the only leg keeping the market above water. It won't be enough, if America is any example, or the UK.
Debt Zombie = Paying minimum payments on a credit card - same applies to housing debt
Long-term renting = Desperate for house price drops (but the drops never come!) But Desperate renters are fighting each other for a slim chance of living in a decent house. Renters = no capital gain. No long-term security for their family. Renters facing rent hikes continually. Can't even have a dog.(Landlord says NO). Can't plant a tree (Landlord says 'yes - i'll have your tree).
Renters = pour their money in Shares, Term deposits, other corporate 'investments' = losing money.
Home owners - never been so cheap to own & pay down a low rate mortgage....
Agree (sort of)......when everyone decides to exit property.......the price drops will be large...50 to 60%....
Sort of....well peak oil changes so much.....
If you paid 30% of its present value such as I, not so bad.....if you paid 90% and still owe 85% you are buggered.....if you are a PI and are leveraged now I cant see how you survive this drop.....
regards
Religious belief, once again. "houseprices only go up" is the mantra.
The wake-up call will be no different here as is was for people in America and the UK, where they said for years "they aren't making any more land, you can't lose, there is a housing shortage, etc." then Lehman Brothers happened, and everything changed.
We are witnessing a liquidity trap, and a viral fear of lending or borrowing on a massive scale. As money dries up, so does the property market, ultimately.
The broader macro economics matter more to the average person than he realizes, as he makes his mortgage payment. In this much uncertain environment, you sit it out until the trend has established itself- do you really believe we have the makings of another property rally? If you do, then I guess you deserve everything you have coming to you, and i don't mean that as a compliment.
In fact, i hope I'm wrong, because while I'm in no hurry to buy a house, I know that a lot of families are going to suffer tremendously when this thing goes down, and stays down. I beleive we are in it now, but it's just not common knowledge-yet.
What would we be looking at if we didn't have our central bank lower interest rates, and had kept their promise that rates would be going up in 2010? That should tell anyone that the ONLY reason that the market hasn't crashed is because of the good graces of an agency over which you have ZERO control. That is not how I like to invest.
The only reason that rates are low, is to prevent defaults en masse, destoying bank loan portfolios, and crashing the banks, just like we are witnessing in America. A major bank collapse hasn't happened in Australia or NZ-yet, but it will come as no surprise to me when it does. That will mark the destruction of so many retirement dreams and investment portfolios- which is why I hope I'm wrong.
The best we can hope for is more money printing- but that's bad too. Either way, we're entering some difficult times ahead for most people, in fact, I'm certain we are already in it. Notice how prices rise, but your wages do not. People moving to adjustable rates is another symptom- why? THEY NEED TO SAVE MONEY FOR FOOD!
All that "they" have to do is keep people believing that house prices go up forever. That's rather hard to do when people now buy homes based on payments, not on whether or not they can actually pay off the debt. That's a recipe for eventual disaster, as evidenced by the growing number of people paying as little principle as possible, in essence, keeping the debt till "mort' or death.
i know, I know. it's different this time.
Should all homeowners, paying their mortgages, wonder if they will lose their homes to the bank? I think they should, or get out while there is still some semblance of a market, and the exits aren't crowded. If you have a gain, why not lock it in and buy something else for a while? Property as a "trade" is quite crowded, that's a sgn it's time to "go short."
When this guy, who has the largest bond fund in the world (at $1.3Trillion), starts talking credit disapperaing, and about gold, then you know something big is afoot, because it's becoming a matter of return OF your investment, rather than return ON your investment.http://www.beaconequity.com/bond-king-bill-gross-likes-gold-2012-02-01/
If governments around the world respond by printing money, then those curriencies become diluted. Because our country isn't keeping up, our currency gets stronger, making our exports more expensive, and slowing our growth, as well as our ability to service debts- look to Japan for an easy example. To the uninitiated, strengthening currency spells "recession."
How will you pay your mortgage if you can't find a job? All you need is a small percentage of people in dire straights, having lost a job, then their house, to bring the market down in a cascade-like fashion, like in America, especially if the NZ currency remains stubbornly high,
God help us if our country's debt paying ability ever gets called into question- like Greece. I don't want to be holding a mortgage, especially one at variable interest, when that happens. When it DOES happen, i expect property to get very cheap, very fast.
Do you think the average Greek retiree saw any of this coming, 2 years ago?
Do you think the average Greek homeowner feels positive about the value of their property right now? How about Italy? Are we really that special?
With kiwi's holding all of their eggs in one basket, it makes a virus spread very easily. It's probably best to invest in everything except property right now, to get out of the way of the deluge of property that is about to hit the market- property of distressed sellers.
I think everybody should lay off BH for a while, because he, like me, just might be early to the ultimate conclusion. It's better to be 3 year early than a day late. Low interest rates are killing jobs and killing savers- the same people who front the money to pay your salary, the ones who take the risk to start businesses, and create jobs. Money manipulators create zero jobs, suck your hard earned dollars out of you, and sadly they are in charge. They have no risk, because they can print money. The average business owner is struggling right now, in case you haven't noticed- and commercial vacancies are way up, in case you haven't noticed. These are very ominous signs- signs that few are willing to take a punt and start a new business... or have you not talked to any commerical agents, lately?
If average business owners are struggling, then perhaps you too should be concerned about paying your bills.
just a few decades ago, if you owned property as an investment in America, you paid 90% income tax from the profits you received, because you weren't creating real wealth, or jobs, was the thinking at the time. And yet, those days saw some of the most consistent economic growth of any time in history,
Like Splineman said- real estate is very ILLIQUID. If you decide to sell, you can't just get out. That is the biggest benefit of being a renter. You hand back the keys and move on. This is especially handy when prices are crashing. You don't want to be the last one, holding the bag.
yep, the only one.....The expotential growth in debt reaching a finite limit problem, can kicking.....the final kick is very close.....has to be.....
Problem is at some stage you reach saturation.....ie your income matches the debt repayments....many countries are at or past that point...and ppl.....Look at Greece.....they wont stand loss of sovreignty me thinks, the ppl if nothing else wll riot and exit the EU.....when that happens so will Ireland a bit after....they will walk away, its less painful.....
So what happens next........will happen.
Also its not up to Govn's I think ie credit is substantially private......when they leave the game of cheap credit is over....so then its print time.....or deflation/depression.......so they will print in order to tread water........but sooner or later deflation and a Great Depression will occur....
I cant see it going past this decade due to peak Oil occuring (about now) as an absolute max.....99% sure it wont be 5 years.....95% sure its < 2 years....
50% sure its 2012....
Its just when not if....
regards
Hi,
....Robert Hirsh is an interesting watch, this piece is quite good,
http://www.youtube.com/watch?v=LWQpfXd79e8
lots of links, ASPO is recognised as the most "professional" ie its filled with oil geologists, academics etc....
two excellent sites.....
www.youtube.com and type in peak oil......
eg
http://www.youtube.com/watch?v=_qeRaBaPRmk
regards
While on a roll this is an interesting piece on passive heating via windows
http://www.theoildrum.com/node/8871#more
regards
If you're interested in peak-oil/physics/energy you should read this blog too. It is written by a physics professor and he does a great job at explaining the current predicament in terms of energy, as well as the alternative energy options we currently have available. His posts are easy to follow, entertaining, and best of all he backs up all his conclusions with the math.
Just another Cassandra
http://physics.ucsd.edu/do-the-math/just-another-cassandra/
Can economic growth last?
http://physics.ucsd.edu/do-the-math/2011/07/can-economic-growth-last/
Discovering limits to growth
http://physics.ucsd.edu/do-the-math/2011/09/discovering-limits-to-growt…
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