A slowdown in home lending and flatter economic figures for the March quarter have tamped down predictions for floating mortgage rates.
!(http://www.goodreturns.co.nz/market/alex.jpg) While a peak of 10 per cent for the floating rate was being tipped by late this year or early 2001, Bank of New Zealand's chief economist Tony Alexander is now looking at the 9 to 9.5 per cent range as more likely.
In the latest *New Zealand Observer,*he says the less-than-traditional peak will reflect constraints on inflation coming from:
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A weak housing market producing practically no house price inflation this cycle;
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A high household debt to income ratio restricting credit growth;
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Import competition; and
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Productivity gains from new technology restricting local and international inflation.
Lenders have largely held tight on any mortgage rate rises since the last OCR review on April 19. That saw the OCR increase from 5.75 per cent to 6 per cent, while a further rise to 6.5 per cent is expected at the review next Wednesday (May 17).
AXA New Zealand, in its latest Looking beyond the consensusreport, points out that floating mortgage rates have already risen significantly from their low of 6.5 per cent a year ago to 8.1 per cent today (the average trading bank rate). AXA is also picking that floating rates will go to 9.5 per cent by Christmas based on its profile for inflation, OCR levels and 90-day bank bill yields (an important indicator for floating mortgage rates).
But back to that slowdown in home lending. Alexander says that the annual rate of growth in lending in March was only 9.2 per cent, compared with an average rate of 11.7 per cent from 1992 to 1999 and an average 14 per cent from 1994 to 1997.
He says it's not only low by the standards of the last eight years but down from a recent peak of 10.8 per cent last October. Part of that's due to the ratio of household debt to household income, currently a whopping 105 per cent for New Zealanders as a whole compared with 60 per cent in 1992.
Another reason is that house prices are still falling in some parts of the country, including parts of Auckland. Alexander says that, on average around New Zealand, house prices are sitting about five per cent above their long-term trend.
Another ingredient in the mortgage rate mix will be the Government's long-awaited review of monetary policy, which will look at such Reserve Bank tools as the OCR. Finance Minister Michael Cullen announced the terms of reference for this review yesterday and said that its aim was to investigate ways of enhancing the Reserve Bank's ability to implement the Policy Targets Agreement (ie achieve medium term price stability and keep inflation to within a certain band) with minimal disruption to the economy.
Deutsche Bank said that, in its view, the outcome of the review would largely depend on who was chosen as the reviewer. That person will most likely come from overseas and be appointed in the next few weeks.
