KEY POINTS:
Mortgage rates have yet to feel much impact from the turmoil in world financial markets, though the jury is out about the effect to come.
Westpac chief economist Brendan O'Donovan said there were forces working in both directions and it was too soon to tell what the net effect would be.
The swaps spread, or risk premium in the international interest rates New Zealand banks pay for a major part of their funding, has widened.
But offsetting that, the underlying risk-free rate - the rate at which the US Government is expected to be able to borrow - has fallen as the markets anticipate four interest rate cuts by the Federal Reserve in the next 12 months.
At the same time banks' need to import funds is being reduced by an increase in local deposits, reflecting high interest rates, switching away from non-bank institutions and general investor uncertainty.
And demand for home loans has declined, O'Donovan said. However, that was partly offset by an increase in business borrowing as corporates which in less turbulent times would have accessed international financing directly now draw on standby credit lines with local banks.
Real Estate Institute figures for July recorded an 11 per cent fall in house sales compared with a year earlier.
"The housing market seems to have topped out and mortgage demand is slowing quite quickly," O'Donovan said.
Borrowers with fixed-term mortgages coming up for reset still face hefty increases, however, that were already in the pipeline before the international market turmoil.
About a quarter of all mortgage debt is due for an interest rate reset by June next year from an average rate of 7.8 per cent. Fixed rates on offer now are well over 9 per cent unless borrowers want to lock in a rate for five years, and even then they are not much below 9 per cent. Floating rates are around 10.5 per cent.
In addition to higher debt-servicing costs households face higher petrol and food costs, O'Donovan said.
"And with a housing market correction seemingly under way, it is going to be quite an awkward period for household budgets."
New Zealand lenders might not have been as reckless as their American counterparts, he said, "but New Zealand is also due for payback for a seemingly limitless appetite for debt in recent years".
But beyond six "difficult" months there was the prospect of a big boost from bumper dairy payouts.
ASB Bank chief economist Nick Tuffley said the steep fall in the New Zealand dollar over the past couple of weeks would provide some welcome relief for the export sector.
"Yes we have lost some wealth in the sharemarket and we might face slightly more inflation on the tradeables side. But any downside rise to the world economy has been more than offset by the fall in the exchange rate," he said.
If the economy faced a significant slowdown from slowing export demand, with the cash rate at 8.25 per cent there was plenty of scope for the Reserve Bank to drop it quickly and precipitate a marked fall in the exchange rate, Tuffley said.
"We got through the 2001 period [when the US went into recession] fairly well by quick action to cut rates and a falling currency."
Bank of New Zealand chief economist Tony Alexander said he did not think house prices were going to fall 5 or 10 per cent, as some observers have forecast.
"I think there are enough insulating factors - the strength of the labour market for one - that house prices are just going to flatten out," he said.
"I don't have a great deal of concern about the New Zealand economy."
The world economy went into this period of turbulence with a lot of momentum, he said.
CAUGHT IN MIDDLE
* Borrowers with fixed-rate loans due to be reset have been facing the prospect of sharply higher rates for some time.
* But the fear-racked state of world credit markets has not pushed home loan rates higher - at least not yet.
* Two opposing forces are at work on the interest rates the banks pay for overseas funding.
* The risk premium has risen, but underlying rates have fallen as the market expects the US Federal Reserve to cut its policy rate several times.
