Proposed Reserve Bank changes will push up mortgage interest

The Reserve Bank has proposed significant increases in the amount of capital that banks are required to hold for 8.5% to 16%.

This would push up  mortgage interest rates, the Reserve Bank thinks by 20 and 40 basis points, but banks say it will be more like 100.

Newsroom: RBNZ proposals ‘will add $6000 a year to mortgage’

Westpac says the Reserve Bank’s bank capital proposals will mean homeowners with an average mortgage in Auckland will be paying about $6,000 a year more in interest.

The Australian-owned bank says the central bank has greatly underestimated the cost of its proposal to near double minimum tier 1 capital from 8.5 percent currently to 16 percent for the big four banks and 15 percent for the smaller banks.

The RBNZ has said its proposals would add between 20 and 40 basis points to the cost of a home loan and that amount would be lost in “noise” around interest rate changes but Westpac says the cost will be more than 100 basis points in its submission on the proposals.

Westpac says RBNZ hasn’t provided “quantitative justification” for the proposals which “go well beyond international norms.”

It criticises the central bank’s failure to produce a cost-benefit analysis, a criticism already levied by many commentators who, like Westpac, have said that should have been the RBNZ’s starting point.

Westpac says the absence of that analysis means “it is unclear that the economic costs of implementing the proposals are justified.” It estimates one of the costs will be to shave 1.3 percentage points off New Zealand’s annual GDP.

GDP in the year ended March was 2.8 percent so, if Westpac is right, the bank capital proposals would reduce that to 1.5 percent.

Westpac’s submission is littered with savage criticism of the analysis RBNZ has done. For example, the consultation paper released in December “does not adequately consider” the adequacy of existing bank capital levels.

RBNZ has said New Zealand banks on average carry about 12 percent tier 1 capital, significantly above the current 8.5 percent minimum.

Westpac says the proposals “are not justified by any supporting data or evidence,” RBNZ’s analysis is “materially incomplete and flawed”, and that the central bank has selectively used academic research to back its proposals while ignoring research that doesn’t support them.

The outcome of this argument could be a big deal – or cost – for people with mortgages.

 

Official cash rate dropped to record low

The Reserve Bank has cut the official cash to the lowest rate ever, dropping it 1.5% after being static on 1.75% for two and a half years. Banks quickly indicated drops in mortgage interest rates.

The dropped had been signalled by the Reserve Bank in March, so wasn’t a surprise, but there have been effects on markets.

RNZ Analysis: What the OCR cut means for you

Even for the informed and interested, the past two-and-a-half years have been exercises in “deja vu all over again” as the RBNZ held its official cash rate steady at 1.75 percent, repeating a mantra of the risks being balanced, with the next move likely to be a rise, probably in a year or two … or three.

But that changed in March when the RBNZ governor Adrian Orr said the risks were now tilted to the downside and the next move was more likely to be a cut.

That made the latest monetary policy statement a live event worth following.

Mr Orr and the RBNZ’s newly established monetary policy committee have delivered a rate cut, that may be followed by another later in the year.

But was a rate cut needed, and more importantly will it work?

Opinion has been divided, with backers of a rate cut saying a slowing economy, cooling housing market, stubbornly low inflation, lower immigration, and a gloomier international outlook justified lower rates to stimulate the economy.

Our economy is relatively healthy so why the change down?

New Zealand is doing better than many economies, with growth around 2.5 percent, consumers are still spending and businesses investing, although perhaps not as freely as before, unemployment is close to a 10-year low, and domestic inflation pressures have been bubbling quietly beneath the surface.

One commentator said before the decision that a rate cut would be like sending out the whole fire brigade to rescue one kitten up a tree.

Immediate effects:

The retail banks have been quick to pass on some of the latest cut with floating and fixed mortgages lowered by a little over a tenth of a percent, while deposit rates have also been reduced, which will hurt those relying on their savings with in the bank.

The New Zealand dollar initially fell three quarters of a cent against the US dollar, before reclaiming much of the lost ground and settling about a quarter of a cent lower.

People with mortgages will be happy that their interest rates remain low or will nudge down a bit more.

Banks have already been criticised for not dropping mortgage rates by the whole .25%, but they may adjust them further as they work out how things look and what their business competitors do.

Reserve Bank predictions about KiwiBuild – very slow, and crowding out private development

Reserve Bank Governor Adrian Orr has said that the Reserve Bank predicts a very slow start to the KiwiBuild programme – that’s hardly a prediction, it appears to be current reality – and also that due to lack of capacity much of the numbers eventually built may simply replace what private builders would have constructed.

RNZ: Reserve Bank predicts KiwiBuild will crowd out private building, progress slowly

The Reserve Bank has sounded a warning that the government’s KiwiBuild programme is likely to crowd out other private house building, because the construction industry simply doesn’t have enough capacity.

Reserve Bank Governor Adrian Orr told MPs on Parliament’s Finance and Expenditure committee this morning KiwiBuild would need time to fully pick up momentum.

“It will be a very slow start, which it has proved to be, we haven’t had to change our forecasts much over the last six months,” Mr Orr said.

The Reserve Bank report said the sector was struggling to find enough skilled and non-skilled labour to meet demand.

“Capacity constraints are restricting firms’ ability to meet that demand.

“The ability of the construction sector to build additional houses therefore depends on whether these constraints can be eased.”

That meant resources were limited, which could impact on private investment, Mr Orr.

“It would crowd out resources if you’re chasing for land building activity etc then you have compete to build KiwiBuild versus something else”.

According to the bank’s estimates that would mean for every 100 KiwiBuild homes built, 50 to 70 houses would not be built elsewhere, Mr Orr said.

This isn’t a new idea either.

Housing Minister Phil Twyford said the Reserve Bank’s estimates were just “one more projection” and that he was not “fussed all at” about them.

He agreed with the concerns about capacity constraints.

“We’ve inherited some real difficulties in the construction industry, it’s both a lack of workforce, firms that have trouble scaling up, low productivity, lack of access to land.”

Twyford and Labour should have known that before they made bold promises.

NZ Herald – KiwiBuild warning: Reserve Bank governor Adrian Orr warns scheme ‘crowding out’ private sector

But Finance Minister Grant Robertson appeared to be at odds the central bank’s estimates and said Orr’s forecast was “certainly challengeable”.

Robertson did not seem to agree with Orr’s data when questioned this morning.

“Whether or not I accept that that is the level of crowding out is certainly challengeable, as we have had other advice.”

Robertson would not say what level of crowding out the Government was expecting; only that the Government’s goal was to add “significantly to the housing stock”.

The aim of KiwiBuild was to promote the building of affordable housing, the Finance Minister said.

I don’t think there is any sign so far that Kiwibuild is making housing more affordable.

The project has been trying to get promised numbers of houses built (dismally) but this focus doesn’t seem to have done much if anything to address the costs of building and the lack of available land (that also contributes to the cost of land).

“If we are starting to shift where some of the development is to more affordable, more affordable homes for first home buyers, that’s good.”

Note that he says ‘if’, not that that is what is actually happening.

The Government has a lot of work to do to prevent this from being both a big embarrassment and a costly failure.

Reserve Bank Governor refuses to answer questions

Michael Reddell at Croaking Cassandra writes about yesterday’s news conference with Graeme Wheeler, Governor of the Reserve Bank:

…the outgoing Governor of the Reserve Bank today both refused to accept that he’d made any mistakes, while refusing any comment at all on some of the more searching questions.

The news conference was on the occasion of the release of his statutory monetary policy accountability document, the Monetary Policy Statement.    It was the last opportunity journalists will get to question him.

And yet faced with questions about the Toplis affair (his use of public resources, including his senior managers, to attempt to close down critical commentary from an employee of an organisation the Bank regulates), he simply refused to comment.

I’m sure he is now feeling quite embattled and defensive, but surely it should be unacceptable for a powerful public official to simply refuse all comment on such a chilling example of abuse of executive office?

I hope members of Parliament use their opportunity this afternoon to ask questions on this matter, and to insist on answers.

And:

The Governor also tried to avoid most questions about his term in office (but was happy to provide a long answer to a curious question about risks around North Korea, on which he has (a) no accountability, and (b) no more knowledge than the rest of us).  Apparently there is a speech coming –  which may be interesting, but it provides no opportunity for follow-up challenge or scrutiny.   Asked if his critics have been fair, and if at times their criticism may have clouded his judgement in decisionmaking, he claimed he will cover that in his speech.  If so, that should be interesting.      Asked also about:

  • what surprised him about the economy in the last five years,
  • about his inflation record in the last five years, and
  • what his successor should worry about

he refused to provide any answers, and simply referred everyone to the forthcoming speech.

Odd that Wheeler had a media conference before giving his speech.

A lot more about the failure to answer questions and about Reserve Bank matters in: Consistent to the end…..sadly

Inflation down to 1.7%

Inflation over the last quarter was flat and the annual rate has dropped from a recent high of 2.2% to 1.7%.

RNZ: Inflation slows to 1.7 percent

The consumer price index (CPI) was flat in the three months ended June, slowing the annual inflation rate to 1.7 percent from 2.2 percent, Statistics NZ said.

A fall in fuel costs and airfares offset higher prices for household basics such as food, rent, and power, while the housing boom lifted the price of a new house.

One of the main drivers of the lower annual rate was cheaper telecommunications products and services.

The relative strength of the New Zealand dollar also helped dampen inflation by making imported goods cheaper.

Housing rentals rose slightly (up 0.4 percent), held down by a 1.6 percent fall for Canterbury.

Prices for newly-built houses, excluding land, rose 1.8 percent this quarter.

Seasonally lower domestic airfares (down 14.5 percent), lower petrol prices (down 1.9 percent or and average 4 cents a litre), and seasonally lower prices for car rentals contributed most to a drop in overall transport costs.

Higher vegetables prices pushed food inflation up 0.7 percent in the June 2017 quarter to 2 percent for the June 2017 year. Vegetables prices rose 19 percent for the year, with higher prices for lettuce, kumara, and broccoli.

The inflation numbers were below market expectations and Westpac acting chief economist Michael Gordon said that would dampen any notion of interest rate rises by the Reserve Bank in the foreseeable future.

Good news for people with mortgages and other types of loans.

Lack of wage growth is not so good for wage earners.

Inflation since 1990:

  http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-inflation

Inflation up to 2.2%

After years of very low inflation the latest 12 month CPI inflation (year to end of March) has risen to 2.2%, with nearly half of that in the last quarter.

Interest.co.nz: CPI inflation of 2.2% in year to March beats expectations, with housing-related and transport prices on top of cigarette tax rise driving it

Prices rose at their fastest rate in five years during the last 12 months as housing-related costs such as new builds and rentals, transport costs and a cigarette tax hike helped push up the cost of living.

Consumers Price Index (CPI) figures released by Statistics NZ showed an annual increase of 2.2% in the year to March 2017. This was above market expectations of a 2.0% rise. CPI inflation in the March quarter was a whopping 1.0%, adjusted for seasonal effects.

This was significantly above expectations by the Reserve Bank in February, but most of the jump is due to two things, petrol, and cigarettes and tobacco which were bumped up by an increase in excise tax.

The cost of house building and rents were also a significant factor.

Indeed, there was a catch in Thursday’s figures. Excluding the impact of petrol, cigarettes and tobacco, the CPI only rose 1.5% during the year to March 2017.

Tradeable prices (imports and local goods and services in competition with imports) rose 1.6% over the year, its highest since September 2011. Non-tradeable prices (such as newly built houses and other goods and services that do not face foreign competition) rose 2.5%.

Inflation is still quite low and well within the range the Reserve Bank is supposed to try and keep it.

This might put pressure on the Official Cash Rate but economists predict that is unlikely to go up again until well into next year.

ASB economists said they still expected the next OCR increase to come in late 2018. “We expect the current lift in headline inflation will be temporary, as does the RBNZ, given there were several ‘one-offs’ in Q1,” they said. “Nonetheless, we expect annual inflation to hover around 1.5% and 2% over the next few years.

So it’s a bit unusual compared to what we’ve had over the last few years but it doesn’t seem anything to get very worried about.

Government stalling on housing

Housing has been a major and growing problem for the Government, and their lack of action in trying to stem escalating prices has been one of the biggest legitimate criticisms of them.

And Finance Minister Steven Joyce appears to be stalling further because it is election year.

Stacey Kirk: Facing a firing squad, what’s left to do but stall?

An old advertisement used to run on TV, in which a man facing firing squad asks for a Pixie Caramel as his last request.

In the extended time it takes for him to down that long chew, his shooters fall asleep and he scales a prison wall – evading consequence for as long as he can outrun the inevitable chase that follows.

The man facing firing squad is Finance Minister Steven Joyce, and his Pixie Caramel is a cost-benefit analysis of debt-to-income ratios (DTIs).

That doesn’t look anything like Joyce but you get the picture.

The Reserve Bank wants another clip on its tool belt to apply DTIs – a restriction which would limit how much banks could lend to people, based on their income.

The move is intended to avert a personal debt crisis that could occur if buyers continue to borrow large amounts to get a foothold in a rampant housing market, but become unable to service their debt once interest rates start to rise.

But the collateral damage would likely see a saw cut through the bottom rung of the housing ladder.

Thousands of first home buyers would be priced out of the market, many on incomes where a cap on what they could borrow wouldn’t be able to buy a one-bedroom home in Auckland – a city where $1 million is now the average house price.

“Not in my election year, you don’t,” Finance Minister Steven Joyce has effectively told Reserve Bank Governor Graeme Wheeler.

He has manoeuvred to divert the Reserve Bank from undertaking the controversial housing measures in an election year, by asking them to carry out a cost-benefit analysis and public consultation for the measure before he agrees to give them the ability.

The greater good versus political priorities in election year?

And while Joyce’s move may be cynical, it does show a sure-footed approach to political management and exactly why Joyce has doubled repeatedly as National’s go-to campaign manager.

He managed a National disaster in the Northland by-election campaign.

Stuck against a brick wall with a crosshair aimed between his eyes?

In election year, Joyce doesn’t want the headache.

What’s more important, Joyce’s head  or the New Zealand property market?

With a risk of stuffing housing even more and also bombing in the election.

OCR lower, mortgage rates higher

Most local news was overshadowed by the aftermath of the US election yesterday, but the Official Cash Rate was reduced to a record low of 1.75%. This was signalled and expected.

However mortgage rates have not followed suit, in fact some have started to rise.

ODT: OCR cut, but lower mortgage rates unlikely

As expected, the Reserve Bank cut the official cash rate to a record low 1.75% yesterday, with expectations the country’s stubbornly low 0.4% inflation rate will rise to the midpoint of its 1%-3% target.

The quarter point cut is not expected to be passed on in lower mortgage rates by banks, which are having to borrow money offshore at higher rates, partly because of the lack of deposits domestically.

Mr Wheeler said his current projections, including yesterday’s cut, would see economic growth strong enough to have inflation settle near the middle of the 1%-3% target range.

“Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.”

On the question of the OCR being cut, but not passed on to mortgage borrowers, BNZ external relations consultant Mac Dalton said it was timely to remind borrowers that interest rates were not solely linked to the OCR.

One source of funding for banks is local deposits, and at present there were more people wanting home loans than there were people saving, Mr Dalton said.

“So to encourage and attract more deposits, people’s savings and terms deposits, we need to pay a sharper return to savers,” he said.

Also the banks still needed overseas funds to fill the gap, and the cost of those funds remained volatile, he said.

So while it looks like mortgage rates are unlikely to be coming down any further we still benefit from record low rates.

Human error correction doubles inflation

After discovering a ‘human error’ Statistics New Zealand has adjusted the inflation rate for the year to September, doubling it to 0.4%.

Stuff: Rego error at Statistics NZ doubles inflation, complicates life for Reserve Bank

Human error has been blamed for a mistake in official figures about the cost of living, creating a new headache for the Reserve Bank on whether to cut interest rates.

On Monday morning Statistics New Zealand blamed a “manual processing error” for its decision to correct its estimate of the increase in inflation in the year to September, from 0.2 per cent to 0.4 per cent.

The mistake related to how much the agency believed the cost of licensing a small car – commonly referred to as registration or ‘rego’ – had dropped in the September quarter.

I’m surprised that one mistake on one class of car registration makes that much difference.

This change may complicate this weeks Official cash rate annoiuncement.

Although the correction may appear minor, and inflation remains below the official target, it adds weight to the arguments against the Reserve Bank lowering the official cash rate (OCR) on Thursday to a new all time low of 1.75 per cent.

Most bank economists were already questioning the need for a further cut even before the correction was announced.

“I still think the Reserve Bank shouldn’t be cutting rates,” Bagrie said.

“If it were me, I’d be biased towards holding [the OCR at 2 per cent]. But I think [the Reserve Bank’s] forward guidance has been so strong that they’re going to find it hard to step away [from cutting].

I’m not sure what difference it will make whether the OCR is lowered or not as banks have already indicated that mortgage rates are likely to go up anyway due to international rates.

 

Negligible inflation

The latest Consumer Price Index shows inflation at a negligible 0.2% for both the past quarter and the past year (to September).

This remains outside the Reserve Bank target range of 1-3%, as it has been for the past two years.

With mortgage interest rates at record lows many people will be benefiting from price stability, except for those wanting to enter the inflated housing market or having their rents pushed up.

Some see problems with ongoing low inflation rates but it’s a lot better than the days of rampant inflation.