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Bollard blasts bricks and mortar

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  • Bollard blasts bricks and mortar

    Bollard blasts bricks and mortar
    5:00AM Friday March 09, 2007
    By Brian Fallow
    Reserve Bank Governor Alan Bollard says the housing market is his main concern.

    Reserve Bank Governor Alan Bollard yesterday delivered the interest rate rise he foreshadowed in January accompanied by a monetary policy statement which threatens there's more to come.

    The increase in the official cash rate to 7.5 per cent from 7.25 per cent, where it had sat since late 2005, came with forecasts that show 90-day wholesale interest rates at levels that imply a further increase in the OCR.

    And the central bank is forecasting inflation - even with yesterday's rate increase factored in - still uncomfortably close to the top of its 1 to 3 per cent target band.

    The Reserve Bank sees inflation pressure at every turn: in a buoyant housing market, in a tight labour market, in the stimulus to the export sector from high commodity prices, in the banks' willingness to lend on very low margins to a household sector eager to borrow, and in the Government's expansionary fiscal policy.

    "Our concern is that the recent pick-up in housing and domestic demand may gain momentum, giving rise to a stronger cyclical upturn at a time when resources are already very stretched."

    Yet despite the hawkishness of the statement, the money markets reacted initially by loosening monetary conditions - sending the kiwi dollar almost 1c lower against the US dollar, though it recovered a little and was trading at over US68c by late yesterday.

    And by the end of the day the interest rate market was pricing in a 22 per cent chance that the bank would raise rates again in April, based on Credit Suisse's swaps-based indicator.

    Economists said the bank's message had been clouded, even undermined, by Bollard's raising the issue of alternative measures to support the OCR.

    That was seen as signifying a reluctance to raise the OCR again, even though Bollard was explicit that it would remain the primary tool of monetary policy.

    "It smacks of 'I'm raising interest rates. Sorry'," Westpac chief economist Brendan O'Donovan said.

    But he believed the market had over-reacted. "He has still said inflation is at the top end of the target band in the medium term and all the risks are to the upside, and strongly expressed that he has no tolerance to upside surprises."

    While he thinks another rate increase in April is very unlikely, O'Donovan puts the chances of one in June at 40 or 45 per cent.

    One key argument against raising rates was fading fast as the exchange rate fell, he said.

    ANZ National Bank chief economist Cameron Bagrie said yesterday's decision was consistent with the inflation risk and with what the central bank had said before.

    "It is prudent to raise rates and flag one more."

    But it was puzzling that Bollard had raised the issue of supplementary measures to target the housing market in a monetary policy decision. "It signals a bit of reluctance to raise rates further."

    Bank of New Zealand's head of research Stephen Toplis said, "We find it very frustrating that the Reserve Bank has clouded what could have been a very clear message with all these add-ons. We still believe the bank is much closer to tightening again than the market cares to believe."

    Bollard told MPs on the finance and expenditure committee that the housing market was his main concern and its strength continued to surprise the bank's forecasters.

    The Reserve Bank has revised up its house price inflation forecasts substantially - to still be at about 5 per cent by the start of next year, compared with the 2 per cent fall it was expecting in its December statement.

    The Auckland Chamber of Commerce, the Employers and Manufacturers Association and the Council of Trade Unions all condemned the OCR increase.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Bank waiting for the long, slow burn
    5:00AM Friday March 09, 2007
    By Adam Bennett

    Interest rate rises will hit all borrowers eventually

    You can run but you can't hide. Yesterday's interest rate increase, along with the previous ones, will hit homeowners eventually - even if it's not as fast and hard as Reserve Bank Governor Alan Bollard would like.

    The RBNZ's quarter of a percentage point rate increase to 7.5 per cent yesterday will go straight on to floating and revolving mortgage rates. Westpac raised its floating rate by 25 basis points to 9.8 per cent within hours, the other banks will follow in the next few days.

    Arguably, yesterday's increase had been affecting fixed-term rates, which are influenced by the OCR indirectly through wholesale money markets, for some time. Rates across the major banks' two-year fixed term mortgages have been climbing since late last year on expectations the RBNZ would raise interest rates early this year.

    The four major banks now advertise 8.5 per cent for two years, with the exception of BNZ, which is advertising 8.17 per cent. A rung lower on the ladder, TSB is offering 8.10 per cent.

    On average, two-year rates were around 8 per cent in November.

    But the RBNZ's headache is that almost 85 per cent of mortgages are on fixed terms and so are not affected by rate increases until homeowners have to refinance.

    "It makes the consumer and the housing market less immediately responsive, which does make the RBNZ's job more difficult," said Westpac chief economist Brendan O'Donovan.

    And that is why the RBNZ is looking for other ways to bring the housing market to heel.

    The RBNZ estimates just 30 per cent of existing fixed-rate mortgages will roll over this year, exposing those homeowners to higher rates.

    What's more, its headache is being exacerbated as those whose loans come up for refinancing increasingly choose cheaper, longer-term loans, such as five years. The RBNZ noted yesterday that the average duration of all outstanding mortgages had reached a new high of around 18 months.

    The bank also has less influence on longer-term rates.

    "As a rough characterisation, out to the two- to three-year part of an interest-rate curve, it's very much driven by expectations of where domestic monetary policy is going," said O'Donovan. "Once you get beyond that international developments have much more of a bearing."

    Long-term international interest rates are around 4.5 per cent.

    The RBNZ said the effective mortgage rate - the average rate being paid on outstanding mortgage debt - rose by less than one percentage point from 2004 to 2005, during which time it raised the OCR by 2.5 percentage points.

    However the effective rate rose a further 50 basis points or so to just under 8 per cent over the past 14 months, a period when the bank stayed put, as loans were refinanced.

    On the house

    * 85 per cent of mortgage lending is now on fixed terms.

    * 30 per cent of that lending comes up for refinancing in the next 12 months.

    * 18 months is the average duration of all outstanding mortgages.

    * Average rate is 7.7 per cent.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


    • #3
      Three weapons to knock down housing
      5:00AM Friday March 09, 2007
      By Brian Fallow and Adam Bennett

      The Reserve bank has some options for controlling the housing market

      Three potential measures to give the Reserve Bank more traction in the housing market remain under consideration, the bank indicated yesterday.

      One is greater emphasis on enforcing existing tax laws regarding capital gains made on investment properties.

      This relates to provisions that allow the Inland Revenue to treat profits on the sale of properties as taxable, if they were bought with the intention of resale. It is intended to apply to traders or people who are in the business of property development, not owner-occupiers.

      But the bank notes that this has tended to yield very little revenue to the Government, suggesting that with some well-known exceptions such as a blitz in Queenstown last year enforcing it is not a priority for the IRD.

      The second measure, which would require a law change and therefore political support, relates to "ring-fencing" the operating losses the owners of investment properties often make. This is called negative gearing. Often landlords' expenses including maintenance costs and depreciation exceed the rent they get but that operating loss can be used to reduce their tax liability on other income.

      The ability to use rental properties as a tax shelter in that way, and in effect rely on capital gains for the return on investment, has contributed to the strength of the housing market.

      And that makes Bollard's life difficult by making homeowners feel wealthier and more willing to borrow against some of the increase in their housing equity and spend it.

      The third potential measure is largely within the bank's control.

      Commercial banks are required to hold a minimum level of capital in reserve relative to their assets, including loans, to absorb losses associated with ups and downs in the economy.

      Should the Reserve Bank require banks to hold larger reserves relative to their mortgage loans, that would place a restraint on growth in their mortgage lending.

      When such changes were suggested in late 2005, banks labelled them "draconian" and a return to old-fashioned Muldoon-style interventionism.

      Massey University head of banking studies David Tripe said they made no more sense now.

      "There get to be some problems in doing it. I suspect it's more easily said than done."

      Westpac chief economist Brendan O'Donovan said it was unlikely the RBNZ could introduce such controls in time to affect the current housing cycle.

      "Then there's always the risk of unintended consequences."

      Furthermore such controls would run counter to Basel Capital Accords, which are guidelines on how capital adequacy ratios should be set.

      Under the most recent "Basel II" guidelines which New Zealand is set to adopt next year, banks are likely to be obliged to hold even smaller reserves as property mortgages are deemed to be relatively low risk.

      "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


      • #4
        Originally posted by muppet View Post
        Bollard blasts bricks and mortar
        5:00AM Friday March 09, 2007
        : <Long loud yawn>
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