Bernard Hickey: Rates cut will give little thrust to housing market

Most homeowners are sticking with floating rates. Photo / Herald on Sunday

A bevy of banks surprised homeowners and regulators this week when they slashed their long term mortgage rates by as much as 0.75 per cent.

But is it enough to transform the housing market in the same way that the mortgage price wars of 2004 and 2006 confounded the Reserve Bank and fired up the economy?

The simple answer is no. Firstly, the rates action is happening in the relative boondocks of the housing market, away from the most competitive parts.

ANZ kicked off the latest long term fixed mortgage rate cuts less than a month after the Reserve Bank ended a year-long freeze by increasing the Official Cash Rate. ANZ slashed its 5-year rate by 75 basis points to 7.75 per cent and cut its 2-year mortgage rate to 7 per cent.

All the other major banks soon followed - even Kiwibank, which has been pulling in its lending horns lately because of a shortage of fresh capital and hot competition for term deposit funding from the major banks.

In 2004 and 2006 these cuts would have been big news. Everyone was borrowing for two years and longer to avoid being stung as the Reserve Bank tried to jack up short term rates to slow down the economy.

It was clearly cheaper to borrow on fixed rates then because they were lower than variable rates. That's not the case any more.

Variable rates are about 5.9 per cent, which means anyone taking out a 5-year mortgage at 7.75 per cent is betting that floating rates will be well above their current levels for most of the next five years.

The big difference this time is that banks are finding it harder to get hold of the cheap funding from overseas money markets. Before the Lehman Brothers collapse in September 2008, banks could get cheap funding that they passed on in fixed mortgages that were cheaper than variable rates. Now these longer term mortgages are about 150-200 basis points higher than they were.

Most homeowners are sticking with floating rates, which means these long term rate cuts are unlikely to boost the housing market like they did in 2004 and 2006.

A poll on interest.co.nz last week found 66 per cent would opt for the floating rate, and only 11 per cent would go for the just-reduced 5-year rate.

This reluctance to borrow long is flowing through into mortgage approval figures, which hit a record low this week.


bernard.hickey@interest.co.nz