Reserve Bank of New Zealand Governor Graeme Wheeler’s largest monetary tightening among major developed countries is being blunted by Australian-owned mortgage lenders.
Banks including ANZ Bank New Zealand Ltd. (ANZ) and Westpac Banking Corp. (WBC) have lowered some fixed mortgage rates by more than a quarter-percentage point since January as the cost of global funding falls. That’s hindering Wheeler’s efforts to cool the economy with three quarter-percentage-point cash rate increases this year, the first among developed nations in 2014.
New Zealand joins countries including China, the U.K., Canada and Norway, which are seeking the right policy mix to deflate potential housing market excesses, with some taking steps that limit credit rather than rely solely on rate increases. Months after New Zealand last year implemented curbs on the riskiest mortgages to tame prices, buyers are turning to lower fixed-rate loans that could re-ignite the property market and pressure Wheeler to raise the cash rate more aggressively.
“People forget that it’s retail interest rates that affect the real economy and those have fallen since the Reserve Bank started its hiking process,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “It wouldn’t have been what the Reserve Bank expected or preferred.”
About 70 percent of all new mortgages in New Zealand are being written with fixed rates, according to Wheeler. Home buyers are insulating themselves from rises in variable home-loan rates, which move in line with the cash rate.
ANZ Bank New Zealand Ltd. is offering a two-year fixed mortgage at 5.85 percent for loans with at least a 20 percent deposit and if the customer holds other accounts, according to its website. As an extra incentive, it is offering borrowers NZ$2,000 ($1,740) cash with a loan of NZ$250,000 or more.
Wheeler on June 12 raised the official cash rate to 3.25 percent and said it is important that “interest rates return to a more neutral level,” prompting five economists surveyed by Bloomberg to change their forecast to an increase at the next policy decision on July 24 from an earlier expectation of a pause.
The drop in fixed-term mortgage rates “was an important cog” in why the RBNZ retained its explicit tightening bias rather than hint at a pause as some had anticipated, said Ebert.
The New Zealand dollar surged as much as 1.7 percent after Wheeler’s comments last week. It was little changed at 86.62 U.S. cents at 5:35 p.m. in Wellington today as traders await first-quarter economic growth data tomorrow. Its record high since becoming freely traded in March 1985 is 88.43 cents.
Gross domestic product will expand 1.1 percent in the three months through March taking annual growth to 3.7 percent, its fastest since 2007, according to the median estimate of 11 economists surveyed by Bloomberg.
Local units of Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Commonwealth Bank of Australia Ltd. and Westpac handle about 90 percent of New Zealand mortgages, according to filings and data on their websites.
Cash profit at the New Zealand units of the four lenders climbed an average 14.3 percent in the first half from a year earlier, more than double the growth at their Australian businesses, according to regulatory filings.
“The New Zealand economy is improving and asset quality is stabilizing,” T S Lim, a Sydney-based analyst at Bell Potter Securities Ltd., said by phone. “That is enough reason to go out and increase market share. Mortgage profitability is better than Australia and the market is much smaller as is the risk.”
Average two-year fixed mortgage interest rates in New Zealand fell to 6 percent in late May from 6.3 percent in late January, according to central bank data. Variable rates at most banks are about 6.5 percent, up from 5.7 percent in January.
“Banks seeking to attract borrowers have been competing for two-year and three-year fixed-rate mortgages as borrowers seek to fix rates in the face of expected interest-rate rises,” the RBNZ said.
“Give it another six months at this rate of switching and the Reserve Bank will have an awful lot of people predominantly on fixed rates,” said Ebert. “They will be immune to whatever the Reserve Bank tries to do with interest rates.”
About 725,300 of New Zealand’s 1.45 million mortgages were on fixed rates at the end of April from 635,300 at the end of December, according to central bank figures.
By value, about 35 percent of residential mortgages in April were on variable rates compared with about 13 percent in 2007, when the previous housing boom was nearing a peak, said Peter Redward, principal of Auckland-based Redward Associates Ltd. and a former head of emerging Asia research at Barclays Plc in Singapore.
“Concern that monetary tightening might be losing its traction is misplaced,” he said. Given the number of people still with variable-rate loans, tight bank margins on fixed-rate mortgages and expectations of further increases in the cash rate, “households can run, but they can’t hide,” he said.
Even as fixed rates fall, the RBNZ “still has plenty of leverage” with its interest-rate increases, Wheeler said June 12, noting that the average time to re-price a New Zealand mortgage is still less than 10 months. Monetary policy “still packs a punch,” he said.
Wheeler in October imposed limits on the number of mortgages with a loan-to-value ratio of more than 80 percent. In the six months through March, so-called high LVR lending dropped to 5.6 percent of all loans from 25 percent in September.
The lending restrictions have helped slow house-price inflation to 8.2 percent last month from 10 percent in December, according to Quotable Value New Zealand, a government-owned property research company.
Banks in New Zealand are accessing cheaper money as bond and swap yields fall in line with international trends. Banks set their fixed-term mortgage rates based on swap market levels.
“What we would like to see is a lower exchange rate and higher long-term interest rates,” Wheeler said last week. “The higher long-term rates would assist our objectives on the housing market.”
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