Home loan borrowers may have a bit more time to decide when to lock a long-term rate, the country’s biggest bank says.
ANZ has released its latest property market report, which notes that house prices are generally flat.
The bank’s economists said floating rates and fixed rates out to three years were largely unchanged in the month.
But average four- and five-year rates were slightly lower.
“While that change will be welcome news for borrowers looking to fix for an extended period, Reserve Bank data show that most borrowers continue to have a preference for shorter fixes, with the one-year term by far the most popular.
“That is understandable given the state of the economy, which has fuelled expectations of deeper OCR cuts. Hopes for more aggressive cuts were already high in the wake of the Reserve Bank’s dramatic pivot last month – when two Monetary Policy Committee members voted for a 50bp cut, but they have intensified following recently released weak Q2 GDP data.”
They said they still expected the OCR to be cut to 2.5% in November but there was a risk it could be lower.
“That will please borrowers, even if the reason for it (a softer economy and indifferent housing market) may not! At the margin, we do think that will probably buy borrowers a little more time when it comes to deciding when to fix for longer. But the easing cycle won’t go on forever, and we are mindful that global interest rates aren’t falling, and that may slow falls in four- and five-year rates even if we do see lower shorter-term rates. We still see merit in spreading risk over several terms but expect further slight falls in shorter-term rates as the OCR falls.”
They said at some point in the near future it would be worth borrowers fixing for longer.
“The tone of the economic data-flow suggests that the risk is that rates fall further and won’t start rising till later, potentially buying borrowers a little more time to make any decisions to extend. That said, let’s not lose sight of the big picture: the OCR and short-term rates have come down a long way now, and with markets now expecting more OCR cuts that we are forecasting, we still see merit in extending now, and spreading one’s risk, now that we are nearing the end of the cutting cycle.”
The update included analysis of “breakevens” – the calculation of how much rates would have to change to make taking a certain rate now the more expensive choice.
They said most interest rates would need to fall some way to make shorter fixes a better option now.
“If you are thinking about the next year and are tossing up fixing for six months or one year, you’d only be better off fixing for six months if you thought the six-month rate was going to be below 4.46 percent by March. That could happen, but that’s 48bp below where it is now, during which time, most forecasters expect the Reserve Bank to deliver 50bp of cuts. So, it may be a line call, and if certainty appeals to you, the one-year may be a better option, in ‘a bird in the hand is worth two in the bush’ sense.
“Similarly, if you are thinking about the choice of either one year or two years, to choose the one year, you need to be comfortable that you can re-fix next September at 4.75% or below. You might be able to, but it’s also possible that financial markets could be anticipating OCR hikes by then, even if the Reserve Bank hasn’t actually started hiking.”
rnz.co.nz
