Interest rates expected to plateau soon

A switch has been flipped for mortgage borrowers with the two-year 4.99% interest rate the main banks are now offering.

Instead of borrowing on the floating or the six-month short-term rate while waiting for OCR cuts, borrowers have in the past couple of months flocked to the two-year rate, David Cunningham, Squirrel Mortgages chief executive says.

“The 4.99% rate has been an absolute game-changer," he says. “The two-year term is a traditional one New Zealanders have loved for decades.”

He says a lot of borrowers are coming off 6% and even 7% floating rates and it is huge relief for them. The benefit is immediate.

“It is a good rate and may even go a bit lower. A rate in the 4-5% range is probable for the next few years.”

ASB chief economist Nick Tuffley says in a new report a tepid economic recovery is underway with a mixed bag of influences at work.

Breaking the outlook down to “the good, the bad and the ugly”, he says the good news is coming through the impact of lower interest rates.

They wull soon plateau to their new “normal” level, although this will be higher than what New Zealand enjoyed in the 10 years leading up to the pandemic.

“Their impact on economic growth will be steady rather than explosive – though they will markedly improve the cashflows of home borrowers over the year,“ Tuffley says.

The possibility or rates dropping much lower depends on bank margins and what term deposits are doing, which Cunningham says are more influential than swap rates alone. “Term deposit rates are drifting down step-by-step and tend not to move in one big chunk.”
Deposit rates with a three in front of them are back on the banks’ radars, driven by weak demand for loans.

Some borrowers, if they can afford it, are opting to keep their payments at the higher level to help pay off their mortgages faster, although Cunningham says it is down to individual circumstances.

He says although interest rates and the cost of living went up as inflation rose, it wasn’t quite as tough for some borrowers as normally would have been expected.

“Our advice is if borrowers can afford to maintain mortgage repayments at the same level or a bit lower, then they should do that.”

Some borrowers who have felt the financial squeeze have been hanging out for interest rates to drop and will immediately take the cut. “That is about $4 billion coming households’ way as the year progresses,” Cunningham says.

He is optimistic about the economy this year as there will be a massive surge as interest rates drop.

Cunningham expects the “almost universal” switch to the two-year rate to show up in Reserve Bank lending data in the next month.

Flow based

Meanwhile, Kiwibank head of balance sheet Ross Weston says sweeping to one side fundamentals and theories on interest rates and the Kiwi market becomes very flow based.

We have residential mortgage lending of about $370 billion and about $31billion of fixing a month.

“You don’t have to be a rocket scientist to work out to work out that is $1 billion of fixing that hits the market per day. That is quite large.”

Weston says recently there has been a large amount of fixing, most of it at floating or short term rates, which means there is a much bigger effect when that flow starts to shift longer than a year because banks’ balance sheets don’t have a natural offset.

“They don’t have term deposits offsetting those. Normally there are one year term deposits and one year mortgage terms offsetting each other.”

“When mortgages fix longer, balance sheets don’t have a natural offset sitting there so banks must go into the market and create that liability synthetically and paying swap rates. And when that market gets out of whack there are more payers than receivers and that pushes yields higher.”

He says there is still a large amount of flow to hit the market and if that flow starts shifting longer than a year then that naturally pushes up those rates that are longer than a year.

“That then starts filtering down into OCR expectations and you start seeing one-year fixed rates start to increase on the back of flow as opposed to what is really going on in the market. – ie fundamentals.

“It is like the 1,000 pound gorilla in the room – it can be a significant flow in this market and it can start to distort shortening yields.”

House values turn

The lower mortgage rates have also meant the housing market has started to turn.

CoreLogic’s latest Mapping the Market update shows 54% of the country’s suburbs having stable or rising prices in the first quarter of this year.

While this recovery is in its early stages, the strongest gains have tended to be concentrated in more affordable areas, where buyers appear to be capitalising on relatively lower property values.

Values increased by 6% or more for West Coast houses, particularly some suburbs in Buller and Grey District, reinforcing the role of affordability in driving market activity, the report says.

Among the main centres, Dunedin’s Waldronville (3.9%), Hamilton’s Temple View (3.5%), and Christchurch’s Kainga (3.3%) recorded some of the strongest gains for standalone houses.

For flats and townhouses, Glenleith in Dunedin (6.2%) and Grenada North in Wellington (4.8%) led the upturn, while areas such as Deanwell in Hamilton (4.1%) and Auckland North Shore’s Bayview (3.5%) also recorded notable growth.

Suburbs with declining values have narrowed, indicating the early stages of an upturn. Fewer than 230 suburbs had house values drop by 2% or more over the past three months, while only 111 suburbs recorded similar declines for flats and townhouses.

However, recovery remains uneven, with economic conditions, supply levels, and lending constraints continuing to influence local markets.