Cashbacks rather an interest rates the fight for banks

Compared to other countries, New Zealand’s banks infighting is mainly on cashbacks rather than interest rates in the mortgage sector.

CoreLogic research head Nick Goodall told a Financial Services Institute of Australasia (FINSIA) webinar on insights into New Zealand property, that interest rates might not quite be as competitive from a mortgage perspective as they could be.

“We are seeing the cashback programmes strong as those banks look to fight and pay for new mortgages in the short term, but not have that flow through their books in the form of interest rates either.”

He says it is an interesting dynamic as the way banks are funded in New Zealand plays out a bit differently than in some other parts of the world. “We see much more infighting on the cashbacks than we do necessarily in the interest rates.”

New Zealand borrowers fix for six, 12, 24 months or longer. They adjust their spending behaviour off the back of that and repeat the same fixing, whereas in Australia most people are on the floating variable rate.

It does mean Australia’s monetary policy flows through much faster because as the official cash rate increases, so do borrowers’ payments. And it is the same thing on the way down.

“Australia has seen the same decline in prices and the same falls in the OCR because their economy has suffered by as much as New Zealand’s.”
Goodall says there are interesting comparisons. “Australia certainly has a much more resilient housing market and economy than we have in New Zealand. Here it is partly because of those fixed interest rates  and the OCR probably went further than it needed to on the way up and now likewise is a bit too slow to go back down. It’s hammered the economy and that has flowed through to less consumer spending.”

More cash in pockets

However, he says over the next few months a bit more money will be returned to borrowers’ pockets as they come off higher to lower fixed interest rates when refixing their mortgages.

The cost of living squeeze and reduced spending that led the country through this recession over the past couple of years is now due to be loosened.

“It is a key part of the plan for the Reserve Bank. It’s monetary policy is designed to reduce interest rates and see the economy lift, especially while the Government has been relatively prudent in its fiscal spending. It needs the rest of the economy to be boosted from consumer spending."

DTIs to bite

As the economy improves, Goodall says borrowers will feel the bite of debt-to-income levels.

There is a 20% speed limit on any lending outside the DTI requirements, which for investors is seven times their income and for first home buyers and owner-occupiers is six times their income.

Only about 5% of lending has so far been done outside those limits, so the DTIs haven’t really been tested, but now banks’ test rates are at 7-7.5%, the conversation has become real for bankers and mortgage advisers in dealing with clients outside the limits.

Goodall says it will become a strong conversation if not immediately, certainly in the second half of this year when the market is likely to hear stories of people who are unable to get mortgages because the speed limit has been used up by banks. We expect that to create one of the downward forces on both growth and demand.

He says mortgage affordability is still above long term averages, even though the median income required to service an 80% LVR mortgage has dipped from about 55-56% over the past few years to below 50% of income over the past couple of quarters.

“While things are better than they have been for the past few years from this perspective, it is still tough and I expect that to once again hold the market back more now than otherwise would have been the case if we had seen interest rates fall to this rate and mortgage serviceability improve this much earlier.”

He says compared to the global financial crisis (GFC), it is more of a slow slog back out of this trough than maybe was otherwise expected.