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ANALYSIS
Volatility in global money markets may be eroding the confidence those with mortgages had late last year, as aggressive interest rate cuts looked to be a sure thing.
Nearly half (47%) of the new mortgage debt issued by banks in November was put on floating mortgage rates – byfar the highest portion since at least 2021, when the Reserve Bank of New Zealand started publishing this data.
Before November (the latest available figures), the highest portion of new mortgage debt put on floating rates was 28%, with the average portion sitting at only 22%.
The spike in borrowers opting for relatively expensive floating rates can likely be put down to them believing fixed rates were heading south quickly, so it was worth them paying a bit more in the short term to lock in more attractive fixed rates once the RBNZ cuts the Official Cash Rate (OCR) again.
About 94% of all new mortgage debt issued in November was either floating or fixed for a year or less. Image / Andrew Louis
The RBNZ last cut the OCR by 50 basis points, to 4.25%, in late-November, when it signalled its intent to cut it by another 50bps at its next meeting on February 19.
In October, borrowers were also geared up for decent mortgage rate cuts.
But only 28% of new mortgage debt issued went on floating rates, while a huge 62% was put on fixed rates of either six months or a year.
By November, borrowers leaned more heavily towards floating rates, with the portion of new debt fixed for six months or a year falling to 47%.
That meant 94% of all new mortgage debt issued in November was either floating or fixed for a year or less.
Jim Reardon, a consultant who used to be Westpac New Zealand’s treasurer, said it would become clearer throughout the next month or so whether borrowers who went floating in the hope of fixed rates falling enough to make this worth it, would win.
Financial markets are betting on the RBNZ cutting the OCR by the signalled 50 points in February.
There is confidence inflation is comfortably within the RBNZ’s target range, with the sluggish New Zealand economy now deemed to be a bigger problem than inflation.
Both Reardon and ANZ senior strategist David Croy also noted the gap between swap rates and fixed mortgage rates was relatively wide, suggesting there was room for mortgage rates to fall.
Nonetheless, they believed international factors would put some upward pressure on mortgage rates.
One of the key issues is that investors in United States Government debt, or bonds, have been demanding higher rates of return.
They’re worried President-elect Donald Trump’s policies could be inflationary, limiting the US Federal Reserve’s ability to lower interest rates.
Investors are also wary that the world is awash with government bonds post-pandemic. A number of governments, including the New Zealand Government, aren’t paying down their Covid-era debt, all while they’re issuing more debt to pay for new spending.
This is happening as central banks are no longer creating money to buy large quantities of bonds, as they did in 2020 and 2021.
So, bond prices are falling, and their yields (or the interest rates payable to investors) are rising.
Croy noted that rises in 10-year US Government bond yields typically lifted longer-term New Zealand Government bond yields.
But the spike in US Government bond yields has been such this week, that it’s lifted shorter-term swap rates in New Zealand, which correlate with typically popular one and two-year fixed mortgage rates.
This might have prevented fixed mortgage rates from falling in January, perhaps as some of those borrowers who locked in floating rates in November had hoped.
Both Croy and Reardon stressed that domestic factors still had the greatest bearing on New Zealand mortgage rates.
But Croy cautioned that the RBNZ would also be mindful of what cutting the OCR more aggressively than its international counterparts could mean for the New Zealand dollar.
Getting too out of step with the Federal Reserve, for example, would weaken the New Zealand dollar against the US.
This could push up the price of imports into New Zealand to the extent it spurs inflation, curtailing the RBNZ’s ability to cut the OCR as much as it otherwise would have.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
