Home Loans "unusually elevated"

Business Day

The Reserve Bank considers margins being paid on floating rate mortgages are unusually high, and also thinks the bottom of the housing market has yet to be reached.

In its six-monthly Financial Stability Report published today, the Reserve Bank said reduced loan growth was likely to depress bank profits, but the impact would be partly offset by increased interest margins. Banks were reflecting higher credit risks in the lending rates charged to borrowers.

“After falling steadily for several years as the domestic loan market became increasingly competitive, the New Zealand banks’ interest margins increased slightly in the fourth quarter of 2008,” the report said. “…margins on some lending (such as floating rate mortgages) have been unusually elevated at times, and the Reserve Bank is continuing to monitor this issue.”

Answering reporters’ questions after the report release, Reserve Bank deputy governor Grant Spencer said now was one of those times when floating rates were unusually high. “We do see a considerably higher margin on floating rate mortgages than on most fixed rate mortgages,” Mr Spencer said. “So in our view there’s probably, we feel there’s scope for more competition in the floating rate mortgage segment of the mortgage market.

“Those margins really have been as high as I can ever recall on those particular rates, on the floating rates.” Mr Spencer also defended the Reserve Bank’s reliance on the official cash rate (OCR) to achieve its policies. A fortnight ago the Reserve Bank lowered the OCR a further half a percentage point to 2.5 percent, having brought it down from 8.25 percent last July.

Today, Mr Spencer said the OCR reduction at end of April had some impact on interest rates, but it was probably fair to say the Reserve Bank had been disappointed with the response so far. But the relationship between the OCR and retail rates was not precise, with other factors also affecting the actual mortgage rate.

“We may well see further reductions in mortgage rates as some of those other conditions in the market’s change,” Mr Spencer said. At this point the Reserve Bank was not considering changing its policy approach or introducing any unconventional instruments that had been seen in some other countries. “We don’t think that the OCR has just lost leverage,” he said.

“I don’t think it’s reasonable to say the OCR has lost its punch. There’s still potential scope for monetary policy leverage.” Today’s report noted house prices were around 9 percent lower in the final quarter of 2008 compared to their peak a year earlier.

That was the largest annual drop in property values since comprehensive records started in the 1960s. While indicators suggested the downward momentum had continued in the early part of 2009, the correction in the New Zealand market so far had been relatively modest compared with the experience internationally.

Despite the recent declines, house prices still appeared to be somewhat overvalued relative to fundamentals, although there were some tentative signs the price declines may start to moderate in the next few months. Mr Spencer acknowledged “a bit of a pick up in the housing market” recently.

But he added, “we still think there’s adjustment still to come, and it’s a bit too early to call the bottom of the housing correction”.