Kathryn George / Stuff
The cost of home lending has risen, but don’t expect it to fall to new, extraordinarily low levels, says economist Tony Alexander.
People shouldn’t be optimistic about interest rates falling rapidly or stabilizing at new extraordinarily low levels in 2024 or 2025, says independent economist Tony Alexander.
Analysts predicted Reserve Bank Te Pūtea Matua would win its fight against inflation and likely ease monetary policy before the end of 2023, Alexander said in its latest newsletter.
But he warned: “Interest rates will not come down quickly.
House prices fell following increases in the official exchange rate (OCR) and indications that it intends to push them higher as it fights inflation.
* Bank of New Zealand raises mortgage rates
* Kiwibank and BNZ are following other major banks in raising home loan rates
* House prices ‘could fall 10%’ following official cash rate forecast, economist says
At some point, inflation risks would recede, but Alexander said it would be some time before central banks around the world expressed confidence that inflation was under control.
“Eventually they will, and when they do, it will likely lead to further declines in wholesale borrowing costs that translate into further reductions in fixed mortgage rates,” Alexander said.
“New Zealand banks have already cut fixed rates by 0.2% to 0.4% from a few months ago,” he said.
Reserve Bank Governor Adrian Orr speaks with Stuff a day after raising the OCR.
But behind the scenes, banks’ borrowing costs had risen and banks’ margins on one-year loans were low as they struggled fiercely to attract borrowers.
“The cost to New Zealand banks of borrowing money at a fixed rate for a year to lend to you and me has risen to nearly 4.1% from nearly 3.9% last week. and 3.75% three weeks ago,” Alexander said.
If he borrowed now, Alexander said, he’d probably fix for a year and then in 12 months, think again.
At that point, it could well end up fixing for a year again, if longer-term rates remain stubbornly high.
But he warned that economists’ forecasts of interest rates were wrong and that homeowners considering what to do with their home loans faced many uncertainties.
There were plenty of reasons why New Zealand wouldn’t go into recession, Alexander said, but if it did, it would be superficial and quite meaningless to the majority of the business sector.
Job security would remain high and households had $30bn more saved in bank accounts than before the Covid pandemic, giving them a spending buffer.
“We’re only going to see a decent rise in New Zealand’s unemployment rate if businesses not only feel the pain of falling demand, but also believe the pain will last for a while,” Alexander said.
Export prices remained high, foreign students were returning, as were migrant workers, and tourists were starting to return in numbers, he said.
“My best guess would be that the next time rates bottom out, setting aside an extraordinary shock scenario, the one-year fixed mortgage rate could be close to 4%, and the three-year mortgage rate maybe be close to 4.5%.”
If Alexander were a borrower, he said: “I would probably just stare down a year, looking to take advantage of the monetary policy easing that I expect from the end of 2023.
“But I hope to recognize the poor record we’ve all had in forecasting interest rates since 2008, and look for opportunities to repair some of my debt longer on the trail.”
“Right now, banks are competing for business with heavily discounted one-year rates.”