When it comes to the world I’m a practical guy and maybe a bit of a simpleton. Why is it that bank economists feel the need to constantly talk up mortgage rates? Interest rates had only just bottomed when Chicken Little warned us of potentially large rate increases. There are other commentators talking up rates, but for them I think it was more the result of self-flagellation.
With bank economists I’d like to think that they are truly impartial. Yeah right!
They are unavoidably an integral cog in the wheel of how banks make money. In most instances they sit on the bank’s own “interest rate” committee. Whilst not always the case, I think sometimes their job is to “soften up the customers.” In a lending context that would be to go out and get customers used to the idea of paying higher rates. You’d have to say so far so good!
As the theory goes, the only reason to increase interest rates is to slow inflation. However, the last time I looked property prices were going nowhere, consumers aren’t spending, banks aren’t lending to business, and wages are flat. Looking ahead, we are also likely to see some tax changes to investment property that will soften the property market further.
So from where I sit, wage and property inflation are both dead.
The great news is that when interest rates are low we can pay our debts off faster; as a country we are paying less interest overseas, and the New Zealand dollar has weakened against the Aussie. That’s all sounding pretty good. Why ruin a good thing?
If our economy is growing that shouldn’t automatically mean higher mortgage rates. Hence my comment on flagellation.
What, if anything, has changed?
The Reserve Bank has cleverly started to use new funding measures to control bank lending growth. These measures will slow down debt growth and increase competition for retail deposits. This will also help keep offshore funding costs low and lessen any pressure on our exchange rate.
So do mortgage rates really need to increase? If we do see tax changes announced in May, what will the impact on the property market be?
I’d like to think that a 7% mortgage rate could be the “new normal” for New Zealand. However, future rates will largely depend on Government policy. Maybe we’ll see the start of that in the May 2010 budget with changes to the tax treatment of investment property. I’m also ever-hopeful of better fiscal management. Bureaucracy is one of the biggest inflation drivers in New Zealand, go figure!
Summing up this loose collection of thoughts – I see no compelling logic why mortgage rates need to go up. That will not stop bank economists from continuing to talk up mortgage rates. Sometimes I’m not sure they can separate their real view from that of the hand that feeds them.
