At today’s date, November 29, www.loans.com.au are offering 3.39% variable. The best rate you’ll find on offer at advertised rates in New Zealand is currently 4.29% on a two-year fixed rate from New Zealand Home Loans. Looking over the spread of rates at www.mortgagerates.co.nz, the numbers range from the mid fours to the low sevens.  We asked business commentator and Hive News Publisher Bernard Hickey: are New Zealanders are being taken for a bit of a ride? Does Australia maybe have more lenders and keener competition, and do people get a better mortgage deal here than in New Zealand?

The Australian floating rates are the best deals on offer, Bernard says. In New Zealand the fixed rates tend to be the best deal.

Okay, but on that basis, the best advertised New Zealand deal we could locate today was 4.29%. The best Australian was 3.39%. Doesn’t that at least suggest the banks might be taking advantage of a lack of competition here?

“I think there is bit more competition now than there was a year or two ago, ” Bernard says. From about 2003 to about 2009 “Kiwibank really competed hard to try and win market share off the other banks and force the mortgage market share wars, which actually brought down net interest margins quite a lot.

“From about 2011 onwards – because New Zealand Post and the Government didn’t want to put a lot more capital in – Kiwibank dialled back on the competition.

“So the bank wasn’t quite as competitive between 2011 and 2015. But in the past two years until about 3 or 4 months ago, the banks were getting a lot more competitive and driving interest rates down. That’s one of the reasons why particularly last year you saw lending growth pick up, because the banks were competing quite hard.”

Bernard says the big banks lending interest margins have actually dropped a bit in the last year or so for a couple of reasons:

1. New Zealanders have shifted from expensive floating rate mortgages to cheaper fixed rate mortgages.
2. The funding costs – how much it costs the banks to borrow money on term deposits and wholesale money markets overseas – have got more expensive.

 

“I wouldn’t say that the New Zealand banks are taking us for a ride at the moment. I think they’re trying to increase their interest margins. That’s because they are starting to see the gap opening up between how much money is being lent out and how much is being put in term deposits. In theory the banks they get money in through the front door in term deposits and then they lend out the back door as mortgage lending.”

Ever since the global financial crisis, he says, that money in the front and in the money out the back has been broadly the same, so a bank didn’t have to go overseas to top up. “But the past 6 to 12 months suddenly we stopped saving so much in term deposits and meanwhile the lending growth has substantially increased.”

Why has the saving stopped? He points to a combination of things: baby boomers buying rental properties, owner occupiers doing more renovation, people going on holidays and other spending.

So the banks now have a bit of an issue, he says, and their solution is: offering more in term deposits and “closing the back door for a little bit” by not passing on further rate cuts. If you’re looking for the rates they get in Australia, you might be waiting a while.

Hive News publisher and business commentator Bernard Hickey has been following our housing mania closely for a long time now, and he has good news (sort of): he thinks a correction might not be anything like the apocalypse many people imagine it would be.

40%? Is he sure? At 40% a third of house owners would have a mortgage worth more than their house. Is that viable?

Sure, he says. Yes, it would be a lousy position to be in but it doesn’t meant that you’re busted at that point. “Negative equity is not a problem as long as you’ve still got income to service the debt.”

In other words, you’ll be in a hole, but not one you can’t climb out of sooner or later. Remember also, he says, if there was to be some sort of a shock to bring on that fall in house prices, you would expect interest rates to fall too, so your mortgage servicing cost will be lower.

No, we’re not talking about a wonderful scenario here. You’d have a house worth less than you paid for it and you’d be working to pay it off. But you won’t be driven out in a mortgagee sale, so long as you can keep paying your mortgage. Why? Because it’s not in the bank’s interest to do that.

It’s not like America, Bernard says. There, people would just hand in their keys and walk away, he said, and because of that the banks got in first. “Rather than wait for the keys to be sent in, they went in and foreclosed on people.”

But in New Zealand, he says, you can’t just hand in the keys and walk. “The banks know they’ve got you by the short and curlies through the various mortgage agreements. Basically you’re an indentured servant until you pay it off.”

No, this is not a pretty scenario we’re exploring here. We’re peering over the abyss. We’re asking the what-if question. But let’s keep going, because for at least some people there’s good news in this.

It’s in the bank’s interest to keep things going, even if the values fall, Bernard says.

He notes that the Reserve Bank actually did a stress test to work out whether they could survive a 50% fall in actual house prices. “And the banks passed. I mean, it wasn’t brilliant, but they passed. They were still well above their minimum capital levels and the world didn’t end at all. But people have got the view that we’re now so indebted and so in hock that the banks are so reliant on mortgages that the moment Auckland house prices fall, the economy collapses. Well, that’s just not true.”

It is true, of course, that if it happened there would be a lot of miserable people. But let’s not forget: one person’s loss can be another’s gain. If you’re a young person trying to buy a home, wondering how you’ll ever find the money, “House Prices Fall 40%” wouldn’t be such a discouraging headline. In fact it might be the best thing you’ve read in a long time. Stay tuned.