The cost of home loan has risen, but don’t expect it to fall back to new extraordinarily low levels, says economist Tony Alexander.
People should not get optimistic about interest rates either falling away quickly or settling at new extraordinarily low levels in 2024 or 2025, says independent economist Tony Alexander.
Analysts predicted Reserve Bank Te Pūtea Matua wouldwin its fight with inflation, and probably ease its monetary policy before the end of 2023, Alexander said in his latest newsletter.
But he warned: “Interest rates won’t fall quickly.”
House prices have been falling in the aftermath of increases to the official cash rate (OCR), and indications it intends to push them higher as it battles inflation.
* Bank of New Zealand lifts home loan rates
* Kiwibank and BNZ follow other major banks in lifting home loan rates
* House prices ‘could fall 10 per cent’ as result of official cash rate forecast, economist says
At some stage inflation risks would recede, but Alexander said it would be some time before central banks around the world expressed confidence inflation was under control.
“Eventually they will, and when they do this, it is likely to cause some additional decline in wholesale borrowing costs which will feed through to some more cuts in fixed mortgage rates,” Alexander said.
“Already banks in New Zealand have cut their fixed rates by between 0.2% and 0.4% from where they were a couple of months ago,” he said.
Reserve Bank Governor Adrian Orr speaks with Stuff a day after raising the OCR.
But behind the scenes, bank borrowing costs had increased, and bank margins on one-year loans were low as they battled fiercely to attract borrowers.
“The cost to New Zealand banks of borrowing money at a fixed rate for one year to lend to you and I, has risen to near 4.1% from near 3.9% last week and 3.75% three weeks ago,” Alexander said.
If he were borrowing now, Alexander said, he would probably fix for one year, and then in 12 months time, think again.
At that point, he might well end up fixing for a year again, if longer-term rates remained stubbornly high.
But he warned economists’ forecasts of interest rates had been wrong, and homeowners thinking about what to do with their home loans faced a lot of uncertainty.
There were plenty of reasons that New Zealand would not go into recession, said Alexander, but if it did, it would be shallow and fairly meaningless for the majority of the business sector.
Job security would remain high, and households had $30 billion more saved in bank accounts than they had before the Covid pandemic, which would give them a spending buffer.
“We’re only going to see a decent inflation-suppressing hike in the unemployment rate in New Zealand, if businesses not only feel pain from reduced demand, but also believe the pain will be sustained for some time,” Alexander said.
Export prices remained high, foreign students were returning, as were migrant workers, and tourists were beginning to return in numbers, he said.
“My best guess would be that the next time rates bottom out, putting aside an extraordinary shock scenario, the one-year fixed mortgage rate might be near 4%, and the three-year perhaps near 4.5%.”
If Alexander were a borrower, he said: “I’d probably just fix one year, looking to take advantage of the easing of monetary policy I expect from late-2023.
“But I’d hopefully recognise the poor record we all have predicting interest rates since 2008, and look for opportunities to fix some of my debt longer sometime down the track.”
“For the moment banks are competing for business with heavily discounted one-year rates.”