Goodbye to low mortgages next year

[muppet]

Goodbye to low mortgages next year

By JAMES WEIR - BusinessDay Last updated 05:00 30/10/2009

Floating mortgage rates could jump as soon as April next year, rising to more than 7 per cent in a few months as the Reserve Bank starts to lift official rates, according to some economists.
Others say the Reserve Bank will move "late and hard" from September next year, lifting rates fast and in big bites from 2.5 per cent to 5 per cent or more, pushing up floating rates.
With longer term lending rates already rising and forecasts for higher unemployment, house prices are expected to flatten out after their recent bounce.
The Reserve Bank held official interest rates steady yesterday at 2.5 per cent and reiterated that rates would remain low until the "second half" of 2010.
Some bank economists expected the central bank to start lifting rates by April despite market pricing earlier in the week suggesting a strong chance of a rise as soon as January.
After the Reserve Bank's statement, the kiwi dived to US71.74c yesterday, down from US75c two days earlier.
However, some economists still expect the currency to move up toward US80c over time, as the US dollar weakens further.
ANZ National said it expected the Reserve Bank would move rates from 2.5 per cent to about 5 per cent, starting from September. The Reserve Bank would wait for other central banks around the world to lift their rates first, which would be a sign of confidence about the global recovery.
ANZ National Bank chief economist Cameron Bagrie said most people were borrowing on floating rates or fixed rates of six months to a year because of the much higher cost of a longer term fixed rate.
The Reserve Bank would be comfortable with that trend because when it did finally start to lift rates, "they will get a lot of bang for their buck".
Borrowers were better off being on shorter rates, although they might be grumpy when rates rise later next year.
Mr Bagrie said financial markets had been overly optimistic about a rapid economic recovery.
The recent rebound in house prices was a "dead cat bounce" and masked weakness behind the scenes with rising unemployment and already rising fixed interest rates. House prices were likely to be flat in the next year and land prices were likely to fall.
ASB Bank said if the Reserve Bank got confirmation that the economy was recovering, rates would jump from 2.5 per cent to 4 per cent in three moves, starting in April. That was likely to push up floating rates 150 basis points, from 5.7 per cent to more than 7 per cent.
ASB Bank economist Jane Turner expected the Reserve Bank to lift rates in April, rather the second half of the year because of the pick-up in domestic demand, especially in the housing market.
"The best way to slow the housing market is to raise interest rates," she said.

RESERVE BANK'S VIEW
* Official cash rate held at 2.5 per cent until the second half of 2010.
* Inflation "comfortably within the target range over the medium term".
* Housing market has partly recovered from price falls.
* Signs of a gradual lift in household spending.
* Government spending is supporting activity.
* But business spending is weak and credit growth is low.
http://www.stuff.co.nz/business/pers...ages-next-year

[donna]

* But business spending is weak and credit growth is low.

Yep - this is the litmus test isn't it? If business is performing poorly then interest rates need to remain low - at a guess.

And changes in lending rates (upwards) will more than likely curtail these more positive signs..

* Housing market has partly recovered from price falls.
* Signs of a gradual lift in household spending.

cheers,

Donna

[devidfox]

If the interest rates go up as much as expected in the next year or so; does that not mean that there will be an enormous amount of people struggling to maintain their mortgages? Isn't that what has happened elsewhere in the world in a similar fashion? Is it a wise idea?

[CJ]

If the interest rates go up as much as expected in the next year or so; does that not mean that there will be an enormous amount of people struggling to maintain their mortgages? Isn't that what has happened elsewhere in the world in a similar fashion? Is it a wise idea?

Only to the extent people have lost jobs. We had high rates only 1 year ago and people were surviving.

[Jumpin]

Only to the extent people have lost jobs. We had high rates only 1 year ago and people were surviving.

Not really. Most people had fixed their mortgages last year so were shielded somewhat from the high rates. That was what frustrated the RBNZ because their efforts to cool the economy/housing market by increasing rates had a very delayed effect. The sudden crash the economy had came from overseas rather than domestically.

I suspect that a sudden sharp increase in rates next year would be rather too detrimental to the economy. I would suggest that any increase may be rather slower than predicted, as the recovery will be weaker than suspected, the high dollar will continue to dampen exports. It will be a balancing act and difficult to get it right. So there will certainly be blood on the floor.

[CJ]

I suspect that a sudden sharp increase in rates next year would be rather too detrimental to the economy. I would suggest that any increase may be rather slower than predicted, as the recovery will be weaker than suspected, the high dollar will continue to dampen exports.

I am betting on intrest rates rising slower than expected with my mortgages. Interest rate increases will strengthen the dollar and hurt exporters, slowing the economy.

[AndyB]

Though banks' interest rates already vary from the OCR and sit well above it. It could be that the RBNZ raises the OCR by 0.5 next round, yet the banks raise theirs 1.5 - The OCR up 1.0, the banks' rates up by 3 points.
I agree definitely with Jumpin - in terms of the NZD high interest is not so cool. Yet NZ now has to borrow a lot, so it needs a decent carrot ... esp. when the US/Yen and other low currencies start to rise thru their own interest rate benefits which is expected next year/2011. Then on the other hand don't want too much of an interest bill to pay ...
With above phenomena that banks can by their own accord go higher without the OCR seeming to cap them, and with rate rises elsewhere giving a bit of impetus, I think bank borrowing rates could/will go up a few percent.

BNZ Sept. Report reckons OCR will be near 6% end of 2011.

[Commercial Dan]

I'm still not convinced about this one, banks aren't lending and the economy is not growing much at all, if at all.

Be on the lookout for more toxic debt to come out of the States in 2010, low rates could be around for longer than we think.

[spurner]

I think so. The banks are stingy in lending money for housing, infact most things at the moment. House price increases have a strong correlation with the level of lending the banks are doing. If house prices are barely rising there's a lot less reason for the RB to lift the OCR.

Fixed rates may well continue to remain high, with floating and 6 month rates at extreme lows. This is the way the RB wants it, so when things really do start picking up they can hike the OCR and it will have an immediate impact on the majority of borrowers.

Unlike a couple years ago when they hiked rates and it had minimal effect because most people were still on long fixed rates. They have learnt their lesson and won't want to repeat it.

[Jumpin]

The other thing to keep an eye on is the Uridashi bonds and similar. If interest rates here go up faster than US, UK, JPY etc, then cash will flow back into NZD and other high yield currencies. That will make it cheaper to borrow, thus acting as a brake on rates going up too quickly. I was in the UK last month and they accept that low interest rates will be around for quite a while as there is no real prospect of sustained recovery there for some time.

[Bluekiwi]

Jane Turner from ASB is a real plonker.

Its not that she is wrong - everytime !! - that annoys me.

But the fact that she always voices her opinion in a way that she is 100%certain what she says is definitely going to happen.

And she is always wrong !!!

How she keeps her job I have no idea.

[donna]

I see Aussie are set to raise the rates - OCR and the banks predicted to follow with higher increases.

cheers,

Donna