KEY POINTS:
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.
