As Christmas approaches, BNZ’s Chief Economist Tony Alexander cautions that we’ll see a slowdown in the supply of Auckland houses due to lack of finance available to property developers. However, expect a brighter outlook come the New Year.
Inflation around the world has been lower than expected by practically all of us since 2009 and that has seen interest rates stay at unusually low levels. These low rates have been one of the factors propelling house prices upward. Now things are changing.
Banks have recently lifted some of their fixed interest rates, even as the Reserve Bank eased monetary further by cutting the official cash rate from 2% to 1.75% on November 10. In fact, no bank has actually cut their lending rates following the Reserve Bank move. This is very unusual but explicable.
We banks get just under 30% of the money we lend out in New Zealand from savers offshore. The cost to us of borrowing funds from these often bank-wary savers has been rising recently and in just the past week or so some rates have jumped nearly 0.5%.
This jump has occurred in the United States, where President-elect Donald Trump is expected to cut taxes, boost spending and run larger budget deficits. That means more bonds issued into the marketplace to finance excess spending and higher interest rates on those bonds than would otherwise be the case.
These higher US government borrowing costs – so far up 0.5% for 10 year bonds – are feeding through into corporate borrowing costs and applying some lesser upward pressure on borrowing costs around the world.
But it’s not just a general rise in offshore borrowing costs which is causing fixed rates to rise in New Zealand and preventing cash rate falls from producing lower floating mortgage rates. Ahead of the GFC, New Zealand banks were getting nearly 40% of funding from offshore. That high dependence upon offshore savers is our biggest banking system threat and it has been only partly addressed these past nine years with the proportion to about 28%. This dependence needs to be reduced further.
What this means in practice is that when we lend in New Zealand, now we need to fund here as well. But, historically Kiwis are notoriously bad savers and low term deposit rates have caused people to reduce saving in banks and in fact, gear up existing savings into property in a search for yield.
If term deposit rates get cut further, then our funding problem will become worse. Therefore, unless there is general agreement that it is a wise and safe move to increase our financial and economic dependence upon the saving whims of foreigners, term deposit rates are likely to slowly edge up from current levels.
Rising offshore funding costs and rising term deposit rates means rising mortgage rates. Will rates rise far? Probably not. We still see a low global inflation environment going forward for a wide variety of reasons. We also don’t think New Zealand monetary policy will be tightened until 2018. But in the very near future higher fixed rates are virtually guaranteed.
Will this retain the housing market by much? Probably not. The issue for borrowers is raising a big enough deposit to get a mortgage, and finding a house to buy – not the cost of the borrowed money. In addition, as reported in the media for near three months now, bank lending to property developers has slowed down. This reflects a prudent risk management approach, brought about by awareness of what usually goes wrong every property cycle – too much bad building by inexperienced operators selling too many apartments off the plan to people who fail to settle.
But in addition, as noted above we need to reduce our dependence upon foreign funding even further. So while banks will continue to fund property developers, it will largely only be from money eventually freed up by developers already borrowing the money, completing their projects and receiving full payments from the unit buyers.
What this means is that growth in the supply of dwellings in Auckland will be slowed down through lack of finance to property developers. The upshot will be continued support for already high prices and our ongoing suspicion that come the New Year, the market will speed up again once the immediate effects of the most recent tightening of LVR rules have passed.
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