KEY POINTS:
The "credit crunch" that has sent the sharemarket and New Zealand dollar tumbling is threatening to drive mortgage costs even higher when households are already struggling with the effects of four Reserve Bank rate increases this year.
Big international investors exposed to increasing defaults at the low-quality end
of the United States mortgage market have run for cover by dumping riskier assets, including New Zealand shares and currency.
What's more, as the investors seek to strengthen their financial position by gathering up and holding on to cash, the supply of money on international markets has slowed.
That has resulted in a higher cost of funds for banks, which who will inevitably be forced to pass that on to borrowers.
This week, ASB Bank chief executive Hugh Burrett said the cost of money on the "swaps market", where banks access much of their funding for fixed-rate mortgages, had ticked higher.
Yesterday, Graham Hodges, the chief executive of New Zealand's largest bank, ANZ National, said all participants in the global banking system would face "a few more basis points [hundredths of a per cent] cost for borrowings".
"People are more risk averse and so over time that will transmit presumably into a slightly higher cost of borrowing for the New Zealand market if these international events continue as they are."
Other commentators, including David Chaston of interest.co.nz and Bank of New Zealand senior economist Craig Ebert, saw potential for greater increases.
"Extra pricing hasn't hit our wholesale swap market yet but it's coming," said Mr Chaston.
Mr Ebert said that while higher rates on the swap market were "a big risk that's sitting out there", a bigger risk was the potential impact of the kiwi dollar's plunge in recent weeks.
The sharply lower currency would see the price of imported goods rise and export earnings take off.
"It's a huge inflation timebomb that has blown up in the Reserve Bank's face," said Mr Ebert.
"You can cope with that a little bit better when inflation is under control, but we know the Reserve Bank's quite discomforted with where inflation is at, and hopes it has done enough to bring the economy and inflation back down. Its leeway is absolutely zip at the moment."
The prospect of another Reserve Bank rate increase or higher bank funding costs being passed on to borrowers was an unpleasant one for households already doing it tough, said David Young, president of the Credit and Finance Institute, the professional body for credit managers, insolvency practitioners and debt collection agencies.
Meanwhile, the dollar's fall has probably minimised the damage to New Zealanders' retirement savings resulting from the recent global sharemarkets plunge, said Rozanna Wozniak, chief economist for investment manager Arcus.
Much of New Zealand's retirement savings are in managed funds, most of which have increasingly favoured investments abroad over the local sharemarket in the past year.
Like the NZSX, overseas markets have suffered big losses in the past two weeks, "but the currency has been a nice natural hedge for them," said Ms Wozniak.
Move made bank $90m
New Zealand's plunging dollar is expected to have yielded the central bank a "paper" profit this week of around $90 million. Figures from the Reserve Bank revealed it spent a net $736 million selling NZ dollars in June, in a bid to arrest the flight of what was then a soaring currency.
But an almost 10 per cent plunge this week in the value of the dollar is believed to have increased the value of the investment in US currency to the equivalent of about $834 million.
Danica Hampton of the BNZ said the threshold at which it would start buying NZ dollars again was likely to be whenever they reached their long-term average value of around US60c.
Lending differences insulate NZ from US-like mortgage meltdown
The meltdown in the low-quality end of the US mortgage market that has sparked a rout in global financial markets is unlikely to be seen in New Zealand because of crucial differences in our financial sector.
The US problems are related to the fact that most home loans are packaged into financial instruments similar to bonds by the initial lender and sold to investors. The purchaser has little assurance as to the quality of those underlying loans.
In New Zealand, where the home loan market is dominated by three large banks, the mortgages are held by the banks for their duration, giving the lender a far stronger incentive to ensure the borrower has the capacity to maintain repayments.
Of bigger concern in New Zealand has been the growing amount of "low doc" and high LVR (loan to value ratio) lending. Low doc loans allow customers to self-certify their income levels rather than supplying proof of what they make while high LVR loans are made with little or no deposit.
But KPMG deputy chairman of financial services Godfrey Boyce said low doc loans accounted for perhaps 2 per cent of NZ mortgage debt.
ANZ National Bank chief executive Graham Hodges said such loans were not necessarily low quality. Low doc loans tended to be extended to tradespeople and contractors who did not have regular income, while high LVR loans were often made to borrowers with significant assets.
