Golden rates age set to last

New Zealand is currently enjoying a sustained period of historically low mortgage rates and they are expected to remain low for some time.

But questions about just how long this golden age will last are not going away.

Now Kiwibank chief economist Jarrod Kerr has provided borrowers with some reassurance that the end is not yet in sight.

Speaking at the Gilligan Rowe & Associates Property Leaders Event last weekend, he said that interest rates are low, very low, and will remain low for a very long time.

That’s because it’s a new world, one with ageing populations and slower growth, and that means interest rates are going to remain lower for longer.

As for New Zealand, the Reserve Bank cut the OCR to a record low in May and they have given us a 55% probability that it will be cut again to 1.25%, he said.

“So our interest rates are low – by our standards. For example, it is the first time in history that US interest rates are higher than they are in New Zealand and Australia.

“Yet relative to other countries, like Japan which has had negative interest rates since the 1990s, we are attractive to foreign investors because we are offering higher interest rates than many.”

Kerr said that there is a lot going on globally and term interest rates are falling as central banks turn dovish to protect asset values.

“I think fixed rate mortgages will remain low, fall further and stay long for a long time. Then they will start tightening up again.

“But I believe that in 10 years time it is highly unlikely that we are going to see the interest rates that we did prior to the Global Financial Crisis (of around 8%).”

In his presentation Kerr also touched on the Reserve Bank’s proposed capital adequacy ratios, which he believes the Reserve Bank will not back down on, and the ongoing threat that debt-to-income ratios (DTIs) will be introduced.

He thinks that DTIs are a tool the Reserve Bank could use if it considered that the banks were behaving irresponsibly in their lending.

“With the introduction of the LVRs, the Reserve Bank warned the banks they were on the cards if high leverage lending wasn’t reigned in and then they did it when the banks didn’t respond. So banks know that now.”

The threat of the DTIs is similar, but it seems unlikely the Reserve Bank would introduce them at this time as lending has tightened up, Kerr says.

“I don’t think that investors should worry about them. I think that we are miles away from seeing them introduced.”