Bernard Hickey: Taihoa on interest rate hike fears
Many people are warning of sharp hikes in interest rates that could upend the housing market. Bernard Hickey shows why these fears are not justified.
This story was originally published in Bernard Hickey’s electronic newsletter The Kākā and is republished with permission.
There have been discussions in recent weeks that borrowers have somehow adjusted to eyeballs and have not been able to handle much of a rise in mortgage rates, especially if they arrive faster and go up more. higher than expected due to some sort of wild and prolonged inflation epidemic.
Banking and market economists here in Aotearoa now expect that reserve bank to start increasing OCR from 0.25% as early as November to around 2.0% over the next two years. This, in theory, would drop one- and two-year mortgage rates from around 2% currently to over 4%, doubling interest charges. The assumption is that it would destroy borrowers and cause some kind of crisis in the housing market and the economy.
Nothing could be further from the truth.
Borrowers currently pay around 6% of their disposable income to repay their loans and a doubling would still leave this percentage well below the peak in operating costs seen in 2008 and 2009, when interest rates rose by more than 10%. . The underside Reserve Bank Chart shown, the red line representing maintenance costs.
In addition, banks are checking borrowers’ ability to handle interest rate hikes, and the average service threshold is now around 6.3%. This means the bank won’t lend you if you can’t handle a mortgage rate of 6.3% or more like the ASB chart below from this. research shows. Even then, most borrowers still have more leeway. They can spend less on other items, including international travel (!), But they will be able to pay off their mortgage without any hassle.
But what about going underwater?
On the home equity front, there’s no hot platform either. Only newer buyers in the past six months or so would have less than 20% equity, and even then that risk for a few quickly dissipates as prices continue to rise. Banks have significantly reduced their loans above 80% since the introduction of LVR controls in 2013. The collective housing market LVR is barely 20%, as this ASB chart shows.
Fortunately for the economy and the Reserve Bank, it has reduced leverage in the housing market since 2013 and there is now little risk of some kind of crisis overwhelming the housing market or the economy. This may not sound like it to those who are trying to enter the market and realize that they need deposits over $ 150,000 and loans over $ 600,000, but that’s because that they are the last. They won’t be able to get a loan if they can. doesn’t manage a 6% mortgage rate, and they haven’t been able to access it for a long time. If they have done it with the help of the parents, the banks can then extract money from the parents, who can also afford it.
If the Reserve Bank hadn’t introduced LVR and the banks used 2% as affordability thresholds, then we would have a problem. But house prices would also be above $ 2.5 million on average, instead of the $ 900,000 they are making now.
Also question the assumption of a rapid and significant rate hike
One argument put forward by those worried about rate hikes is that many borrowers who are currently on shorter term fixed rate deals or who are floating will all rush out and set two, three and five year deals. This “rush to exit” would in turn drive mortgage rates up even more than OCR hikes for those long-term interest rates as banks rush to hedge their positions in the wholesale swap markets. in a kind of brutal feedback loop that turns into a bullish long rate spiral.
Currently, over 75% of borrowers are floating or fixed for less than a year, which could happen if everyone thought interest rates were going to go above 5% in the next year.
Hold your horses e hoa
But many of those who have been in the market for more than five years will be reluctant to take that big leap into a more expensive three or five year deal, given that many did in 2010 and 2014, and were not forced than a year. or two later having to break their fixed contracts with high fees when interest rates come down.
Those pondering this fixing decision should also understand that anyone in New Zealand circles talking about massive inflationary pressures and very rapid rate hikes is very out of step with what’s going on overseas right now. the Reserve Bank of Australia and US Federal Reserve are not expected to increase until 2023, and longer-term wholesale interest rates abroad have actually fallen in recent months.
The delta variant of Covid-19 is triggering new waves of infections across Europe and the United States, forcing new lockdowns. Additionally, China quietly announced an easing of monetary policy on Friday evening due to an apparent slowdown in its economy, which we will have more information on later this week. And last night The President of the European Central Bank Christine Lagarde reported in a interview that further easing may be needed after the end of the ECB’s current quantitative easing program.
My opinion: Don’t be so sure about the quick and big rate hikes that last for years.
And if you’re wondering if New Zealand economists are really that hawkish, here’s the latest from the NZIER shadow panel:
In which a slight majority of NZIER’s shadow monetary policy board wants OCR hike at this week’s meeting. It’s more hawkish than the main banking and market economists. Also far ahead of RBA / Fed / ECB. Too hawkish I find. https://t.co/SHTnS1flVJ pic.twitter.com/tINyKBn6YB
– bernardchickey subscribers (@ bernardchickey2) July 11, 2021
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