23 Jan 2018

Low mortgage rates the new norm - economist

1:59 pm on 23 January 2018

"Unusually low" mortgage rates will be the new normal after predictions they would rise over the last year fell flat, an economist says.

No caption

Photo: RNZ

Yesterday both SBS and TSB banks dropped their fixed one year home loan rate to 4.44 percent, despite warnings issued a year ago that rates would be rising.

Infometrics' chief forecaster Gareth Kiernan said in late 2016 the country was in the midst of a dairy price recovery and the housing market was strong.

Mr Kiernan said the election of the US President Donald Trump also raised the expectation that the New Zealand economy would be lifted by some of his policies.

He said rates had not risen partly because Mr Trump's policies were not as influential as forecasters first thought.

"In 2016 in the wake of Trump's election there was quite a lift in some of those longer terms rates [3 to 5 years fixed] in expectation that he was going to be stimulating the American economy through some of the fiscal policies that he was proposing. Now what we've seen through mid-2017 is that those interest rates have come back down as the power that Trump has wielded has maybe not lived up to initial expectations."

He said the main reason the forecast was wrong was the strong market reaction to the Reserve Bank's tighter loan-to-value ratio restrictions.

"The housing market has slowed significantly in response to those changes and what it does suggest is that there's no need for the Reserve Bank to be pushing up interest rates to try and grapple with that housing market because I guess they've had more than enough ammunition in terms of those LVR changes they've made which has really slowed the market."

Mr Kiernan said it was good news for home-owners.

"When you think about how much some people who have purchased property in Auckland may have leveraged themselves and how much they might have borrowed, the fact that rates aren't rising is probably a good thing."

He said while the economy had not grown as much as expected, it was still performing well.

"The fact that the economy is maybe not growing as quickly as we had previously hoped for is a little bit of a negative but economic growth is still tracking around 2.5 to 3.5 percent so it's not a bad performance.

"I guess from the Reserve Bank's point of view the lack of inflation in the system is a good thing as well as they are keeping those price pressures under control."

He said while less than 4.5 percent was "unusually low", especially for long term rates, it was not likely to change much over the next few years.

"Prior to about 2014 and 2015 I think you would have had to go back to the late 50s early 60s to see mortgage rates this low. I think what we're seeing now is something of a new norm.

"If you look at interest rates internationally over the long term, and I'm talking 300 years or so, you see that generally the higher interest rates that we had in the 70s, 80s and even the 90s were the exception rather than the norm."

One year fixed rates as of 23 January 2018:

ANZ - 4.45% p.a.

BNZ - 4.59% p.a.

ASB - 4.49% p.a.

Westpac - 4.59% p.a.

Kiwibank - 4.45% p.a.

SBS - 4.44% p.a.

TSB - 4.44 % p.a.