Bernard Hickey: Abnormal now the norm

The days of cheap, easy money at low rates and for fixed terms are over. Photo / Getty Images

Some homeowners are wondering when the housing market and the mortgage market will go back to "normal", a situation in which banks lend freely and fixed rates are cheaper than floating rates.

They figure once borrowers can confidently borrow cheaply for longer fixed terms again the housing market can go back on its merry way with rising house prices and solid sales volumes.

But what if that "normal" situation from before the global financial crisis was "abnormal"?

What if the new normal is a situation where home borrowers use variable rates because they are usually cheaper than fixed rates and simply have to risk being stung by a quick rise in mortgage rates when the Reserve Bank lifts the Official Cash Rate?

What if the banks weren't growing lending at annual growth rates of 10 to 15 per cent, as they were from 2005 to 2008? What if the new normal was a credit drought and rising interest rates?

It's finally dawning on some that normal has changed, and not just around the tax treatment of property investment.

If they wanted confirmation they needed only to read the speech given quietly in Hong Kong last week by Reserve Bank Deputy Governor Grant Spencer.

He spelled out in more detail what the new normal looks like for the Reserve Bank and for the economy.

The days of cheap, easy money at low rates and for fixed terms are over. In future when the Reserve Bank raises the Official Cash Rate, more homeowners will be forced to react quickly.

That's because more people are moving to variable mortgage rates. The proportion of variable mortgages has almost trebled to 30 per cent in the past three years and is likely to keep rising now variable rates are consistently 1.35 per cent below two-year fixed rates.

Spencer said this would give the Reserve Bank's monetary policy extra power as it raised the Official Cash Rate in the years to come.

He highlighted how many home borrowers had "slid out the yield curve" before the crisis to take advantage of lower fixed rates that the banks could offer because they were borrowing cheap "hot money" that had flooded in from overseas.

This allowed borrowers to buy a house and sometimes flick it on before the fixed period was over, confident their payments wouldn't change and confident they could borrow even more afterwards.

But now the banks are being more careful because, in part, they're not allowed to dive in and borrow that cheap hot money from overseas.

Spencer has been the driving force behind a new Reserve Bank policy that ensures banks fund from more stable and longer-term sources.

That means the banks are keen to borrow from mums and dads here through term deposits and through longer-term bond issues here and overseas.

That means the new normal is higher interest rates that are more responsive to the Official Cash Rate and restrained bank lending growth.

That was confirmed again this week with bank mortgage approval figures showing the amount approved in the past 13 weeks fell 21.3 per cent from the same period a year ago.

That is the biggest drop in approvals since September 2008, which was the worst month in the global financial crisis.

* Bernard Hickey is managing editor of interest.co.nz

bernard.hickey@interest.co.nz