With some mortgage interest rates dipping below 2 percent this week, many New Zealanders tuned in to find out whether the Reserve Bank could kick along the depressed economy while simultaneously holding back house prices.
Almost everything the Reserve Bank is doing at present is intended to drag down interest rates, and the announcement of $28 billion funding to banks to lend to businesses and homebuyers should have been the most dramatic example yet.
Instead – and perversely – interest swap rates almost doubled to 0.23 percent yesterday, within hours of Bank Governor Adrian Orr’s equivocal responses about whether the Bank would cut the Official Cash Rate (OCR) in March 2021.
“Markets react, over-react, get caught on the wrong side of things, run short of liquidity, respond to rumours, rethink things, and sometimes move on the flap of a butterfly’s wings.”
– Sharon Zollner
The interest market can be fickle and volatile, but economists did indicate that the higher swap rates could slow any drop in mortgage and business lending interest rates.
“Swap rates move around a lot more than retail rates do,” said ANZ chief economist Sharon Zollner. “We are yet to see if this move will prove persistent. Markets react, over-react, get caught on the wrong side of things, run short of liquidity, respond to rumours, rethink things, and sometimes move on the flap of a butterfly’s wings. We will see what the rest of the week brings.”
Ahead of yesterday’s Monetary Policy Statement, everything and everyone had been pointing in the same direction, towards the lower interest rates that are needed to help get families and businesses spending again.
It is understood big banks were offering mortgage rates as low as 2.39 percent earlier this week, for a one year fixed rate, on application, and depending on the loan and the borrower. And Heartland Bank advertised a one-year rate of 1.99 percent.
Today, with the soaring swap rates, mortgage brokers fear those low low fixed rates may be off the table.
“Rates markets reacted violently to the lack of explicit guidance on the cash rate.”
– Jarrod Kerr
“If the swap rates hold at the higher level, then the discounts I’ve mentioned will evaporate,” says Auckland mortgage broker Janet Harris, from Point Home Loans. “It’s so uncertain at the moment.”
So what went wrong? Some commentators blamed Orr and his Monetary Policy Committee for being too vague. More likely, though, the divergent responses to his announcement reflected a very human failing in those hanging on his every word. Put simply, people sometimes hear what they want to hear.
“Today’s MPS propelled interest rates and the Kiwi currency higher,” says Kiwibank chief economist Jarrod Kerr. “Rates markets reacted violently to the lack of explicit guidance on the cash rate.”
For instance, economists at the five big banks had all previously forecast the Bank would drop the OCR below zero in the first half of 2021 – that institutions would be able to borrow money at negative interest rates. Instead of paying interest to borrow money, they would be paid to borrow.
Yesterday, those forecasts changed: ASB and BNZ economists now think the OCR will remain above zero. Kiwibank and Westpac economists still think it will drop into the negative, albeit more slowly. And the ANZ economists are now sitting on the fence (though slightly inclined to agree with Kiwibank and Westpac).
This sort of confusion and diverging views means little to regular homebuyers, property investors and small business owners. What seems clear is that they will soon be able to borrow money at lower rates; the hows and whys and wherefores mean little to most people.
“House prices are rocketing higher in response to a drop in mortgage rates, despite zero net migration, booming construction activity, and a weak economy. The RBNZ’s decision to push mortgage rates even lower will further fuel house prices.”
– Dominick Stephens
So cutting through all the argy-bargy, here’s what economists do agree on. Mortgage rates will drop as a result of the introduction of the $28 billion Funding for Lending Programme, announced yesterday, to begin next month. They may even have already dropped, in anticipation of the well-flagged announcement.
“We expect that the FLP will reduce mortgage rates by around 25 basis points, and will reduce term deposit rates by more,” says Dominick Stephens, the Westpac chief economist.
The Reserve Bank would like to see much of its $28 billion lent to businesses, to help them recover from the deep downturn, and even to expand. But that won’t happen.
Instead, the vast majority of the money will be thrown at the property market, causing house prices to rise still further.
“On the housing market, we think the RBNZ is being wildly optimistic about a spontaneous cooling,” says Stephens. “Recent experience is proof-positive that mortgage rates are far more influential for house prices than physical supply and demand factors.
“House prices are rocketing higher in response to a drop in mortgage rates, despite zero net migration, booming construction activity, and a weak economy. The RBNZ’s decision to push mortgage rates even lower will further fuel house prices.
“The renewed LVR restrictions announced today might take the froth off, but will not be game-changing. We therefore expect the housing market will be at least as strong early next year as it has been late this year.”
“We still expect the economy to stagnate in the first half of next year as firms exposed to tourism start to burn through the cash they accumulated through a good 2019/20 season, the generous wage subsidy, and a winter of stuck-in-the-country Kiwis.”
– Sharon Zollner
Is this deluded? That when the country has just suffered its biggest drop in GDP in nearly a century, when nobody can visit our tourist destinations, when even China is struggling to afford to buy our milk, when unemployment rates are forecast to rise to levels we haven’t seen since the 1990s – how can people invest years of future earning in little houses made of ticky-tacky?
It’s the property investors who may be taking the biggest risks of all; Adrian Orr says it is their highly-leveraged borrowing that poses the greatest threat to the community’s financial stability.
For the past few months, says Sharon Zollner, New Zealanders have persuaded themselves that we dodged a bullet. But that mentality is no longer sustainable.
“We still expect the economy to stagnate in the first half of next year as firms exposed to tourism start to burn through the cash they accumulated through a good 2019/20 season, the generous wage subsidy, and a winter of stuck-in-the-country Kiwis.”
So, looking ahead, growth is down, employment is down, trade and migration are down – but the one metric that needs to ease off is still soaring. That’s house prices.
