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Bernard Hickey from interest.co.nz on personal finance trends, mortgages, homeloan affordability, credit cards and more

Bernard Hickey: OCR held, but rates rising anyway

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The housing market's recovery is running out of steam, says Bernard Hickey.
The housing market's recovery is running out of steam, says Bernard Hickey.

The Reserve Bank has delivered on expectations for a 'steady as she goes' statement that leaves enough wiggle room for rate hikes to start from April 29, June 10, or July 29.

Luckily for Reserve Bank Governor Alan Bollard, he is able to rely on tighter bank lending and higher market interest rates to start sucking the punch out of the bowl before the party gets too rowdy.

Bollard can also afford to keep his powder dry because inflation is not a problem yet and the initial signs of a strong recovery seen late last year have faded somewhat both locally and globally.

Reserve Bank data on credit card billings for December, which are the first useful figures from the key Christmas retail sales season, show sales fell 1.3 per cent on a seasonally adjusted basis.

Mortgage approvals data up until last Friday show bank lending is starting to dry up again. Lending approvals by value, which are a useful indicator of what will happen in the next couple of months in the housing market, fell 2.3 per cent to NZ$645.8 million in the week to January 23 from the same week a year ago.

This is the first year-on-year fall since April last year.

That is less than half the lending going on at the peak of the boom. The Reserve Bank's new rules on prudential liquidity are forcing the banks to pay more for their funds because they are having to raise more money for longer terms and more money from local savers, instead of going to international markets for cheap short term funds. Also, banks globally are having to put aside more of their own capital to back lending, which is making them more careful before they lend.

The housing market's recovery of the last 9 months is running out of steam as this lending dries up and affordability hits the doldrums again. This, in turn, is keeping a lid on any consumer spending excitement.

Various local inflationary influences are also being dampened through other means. Local councils are under the thumb from central government to avoid big local rate increases and some state-owned power companies have frozen their price increases.

There remains a big risk of a double dip recession in the United States, Japan and Europe as the combined weight of heavy public debt and weak banking systems restrict lending and push up interest rates.

The mortgage market is also gradually shifting in New Zealand towards variable mortgage rates rather than fixed mortgage rates. That's because variable rates are now consistently lower than all but the six month rates, which is such a short term it may as well be variable.

This could be a historic shift that gives the Reserve Bank more monetary policy potency, similar to that enjoyed by the Reserve Bank of Australia.

The proportion of New Zealand borrowers on variable rates has almost doubled to 25 per cent in the last two years, meaning they will feel the full effects of an OCR hike immediately.

Those refixing for what was the most popular term of two years have already seen that average bank rate rise from 5.92 per cent in February last year to around 7.2 per cent now.

Interest rates are rising globally too as investors realise the decision through 2009 to shift private debt to the public sector has not removed the debt. It still has to be serviced and eventually repaid, which is increasing the risk of sovereign defaults.

Deleveraging is inevitable and it is a mighty powerful force, almost as powerful as compounding interest. It is actually a different form of the same thing. The Reserve Bank may have held the OCR, but the pressure is on from other sources to hike interest rates and reduce lending growth.

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