Mortgage rates on the rise

By PHILIP MACALISTER

On the mortgage front there's good news and bad news.

The good news is that interest rates are low.

The bad news is that some have already started rising, and the latest predictions from the financial soothsayers, economists, is that more rises will come sooner rather than later.

That means there is a window of opportunity to refinance and lock in a good low rate, but the window is closing fast.

First, a recap of the economic environment.

The experts are saying that overseas markets, particularly the United States and Europe, will bounce back from their recessions more quickly than was predicted several months ago.

Some go so far as to say the massive economic stimulation in the US could see that economy hitting 4 per cent growth this year.

In New Zealand the economy has held up well, largely because farming has been earning good returns.

But there is growing agreement that the agricultural sector won't do so well in the future, although the economy will be buoyed by strengthening domestic demand.

Deutsche Bank chief economist Ulf Schoefisch says positive economic news in New Zealand and overseas is strengthening economists' views that central banks will soon start increasing short-term rates.

Mr Schoefisch is expecting Reserve Bank governor Don Brash will start lifting rates as soon as May.

The reasoning is that employment growth and tourist arrivals in December were better than expected and December retail figures were also robust.

Meanwhile, the housing market is on the up and sentimental indicators, such as business confidence, are positive.

Once central bankers believe an economy has regained a growth momentum they will start to push short-term rates back closer to their average of recent years.

The key point to remember is that when economies slow down central banks decrease rates to kickstart things again.

In the past year they have been highly aggressive with this tactic.

Once it's pumping, though, expect the opposite to happen - rates will rise.

ASB Bank chief economist Anthony Byett says the Reserve Bank also chose to ease rates last year as an "insurance policy" against what was happening overseas, including the aftermath of the September 11 terrorist attacks.

The view emerging in the past week or so is that the increases will come sooner than originally expected.

Mr Byett says these expectations of rate rises are already being priced into medium-term fixed home loan rates.

"We are very much at the bottom of the floating-rate cycle and already on the upstage of the fixed-rate cycle."

Mr Byett's view is that the Reserve Bank's cash rate could rise from the current position of 4.75 per cent to be around 6.5 per cent by the end of the year.

That means floating home loan rates could be up by 2 per cent by Christmas and three and five-year fixed rates could be up by 1 per cent.

The second part of this prediction is already proving correct, with the main lenders starting to increase their fixed home loan rates last month.

Mr Byett says when considering how far out to fix a home loan one has to take a view of what is going to happen in the markets.

Recently some banks and institutions have been offering six-month fixed rates of 4.99 per cent.

Mr Byett says people who take out these rates need to be aware that their rates could be a lot higher at the end of the term.

"There is a strong possibility that when they come off these periods they will be facing considerably higher rates."

"[Borrowers] do have to be careful in the short term."

He says similar issues apply to a borrower who chooses to fix at one year.

They will get a good rate now, and they may be able to refinance at a low rate in 12 months if markets don't pick up as expected.

On the other hand, if markets do take off then refinancing next February may be relatively expensive.

He says it's hard to take a view on the five-year rate as it's very difficult to forecast that far out. The main advantage of long-term fixed rates is that the borrower has certainty.

Perhaps a positive piece of news, though, is the increasing competition being offered in the home loan market by our very own Kiwibank.

The new state-owned bank has already shown its hand in this area and is offering the lowest floating rates in the market at present - even beating those lenders which are traditionally at the low end of the market.

While there has been a mixed reaction from other lenders some, notably the ASB Bank, have been prepared to match Kiwibank, but only in the regions where the new bank is operating.

I F NEW Zealanders' experience with competition proves true to form (airlines, telecommunications etc) then a strong competitor, with branches and a high profile, may keep a check on future home loan rate increases.

The other factor to throw into the mix is New Zealand's booming real estate market.

Figures from the Real Estate Institute of New Zealand (REINZ) this week showed that the strong recovery in house sales, which emerged late last year, is continuing.

The institute says 6771 houses changed hands in January - the highest number of homes sold in the first month of the year since 1997.

The not-so-good news, though, is that the median price has dipped slightly from $178,000 in December to $175,000 in January.

However, figures out from Quotable Value New Zealand released on Thursday paint a different picture. They show that over the past 12 months house prices rose 2.5 per cent, including a 1.2 per cent rise in the December quarter.

Mr Byett says the Quotable figures are more accurate than the REINZ ones, and he expects the trend for continued increases in house prices will continue because of the economic conditions, plus more people are staying home and more are coming back to New Zealand.

Real Estate Institute president Rex Handley says the REINZ figures show that "market liquidity has improved, people are finding it much easier to transact residential property and are perhaps not as fixed in their pricing attitudes as they are in tighter economic times.

"When the economy is depressed, median prices can hold up but volumes tend to fall significantly."

He says continued low interest rates and a competitive mortgage market are supporting activity. The absence of sharp price increases "indicates that people are taking a more mature approach to residential property and that the heated environment in areas like Auckland in the mid-1990s is not likely to be repeated".

What all these figures and information are telling people is that if they have a home loan now is still a good time to refinance it and lock in a low fixed rate before rates start rising again.

"The bargain levels have gone in terms of those fixed rates," Mr Byett says.

By fixing in low rates homeowners should be able to save themselves a good sum of money.

Secondly, if you are into residential property as an investment, instead of managed funds or shares, now is a reasonable time to buy.

Liquidity in the market is good, debt is cheap and prices haven't started rising quickly yet.

"It's a great time to buy," Mr Byett says.

* Philip Macalister is the editor of online money management magazine Good Returns. Good Returns provides news, information and data on managed funds, financial planning, mortgages, insurance and superannuation. He can be contacted by email on philip@goodreturns.co.nz