By mid-2007 the Auckland median house price had jumped 49 per cent to $448,000 and the Reserve Bank was in a real muddle. Its 2004-05 rate hikes had limited effect.
By the time it became clear that the massive fixing of rates through that period had insulated borrowers from the rate hikes, it was too late.
The bank was forced into four further quick rate hikes in succession from March to July 2007. This, combined with a drought, was more than enough to drive the economy into recession.
Now, we are in eerily familiar territory. New Zealand is in the middle of another migration boom. The median house price in Auckland is more than $610,000, up 14.6 per cent from a year ago. Global financial markets are entering another extended period of calm with plenty of easy, cheap credit to be found.
New Zealand's banks have started competing harder by offering cut-price fixed-rate mortgages. They can do this because their profit margins are healthy and they are able to find cheap funding overseas.
The difference in bank profit margins between floating and fixed is startling. Westpac CEO Peter Clare told me last month the profit margins on floating are around 150 basis points and the profit margin on fixed-rate mortgages can be as low as 50 basis points.
The result is that two- and three-year fixed-rate mortgage rates have now been cut to significantly cheaper rates of around 5.8 per cent, well below floating rate mortgages, which have risen to 6.5 per cent.
The market is now ripe for a repeat of the rush into longer-term fixed mortgages seen between 2003 and 2007. At April 30, $131.7 billion worth of mortgages were floating or fixed for less than a year. There was just $61.1b on terms longer than a year.
The opportunity is enormous. If just half of those floating mortgages were to switch to two-year fixed rates, those borrowers would save more than $500 million in interest costs each year and, by extension, reduce the bank profits by the same amount.
The Reserve Bank was remarkably sanguine at its announcement this week about the risk of another rush to fix and the resulting dilution of the power of monetary policy to slow the economy. Governor Graeme Wheeler's predecessor, Alan Bollard, didn't give the fixed vs floating issue a second thought in mid-2003.
Within four years he was referring to the lack of traction when welcoming a Parliamentary inquiry into the then-persistently high exchange rate, which was at least partly caused by foreign borrowing to fund cheap fixed mortgages.
The banks and their regulator would argue this time it's different. Banks are now forced to avoid relying too heavily on cheap short-term foreign funds. They are also seeing heavy flows of local term deposits to fund their local mortgage growth.
Still, few thought in 2003 that house prices would double within a decade or that the All Blacks would take until 2011 to win their next World Cup.
