People thought he was mad three months ago when he predicted house prices going back up, but Westpac chief economist Dominick Stephens says “now about three quarters of people I talk to say, ‘yea, you might be right’.”
In the bank’s latest economic overview, issued this week, Stephens expects tumbling interest rates to spur asset prices, including property. But there are risks.
“New Zealand is locked in a cycle of economic growth driven by ever lower interest rates causing ever higher asset price increases, facilitated by ever increasing household debt. This cycle can’t last forever, and when it ends things could turn ugly.”
He figures that eventually inflation will eventually cause interest rates to rise again, but further into the future. Meantime rates may go down again, but the bank is predicting house price inflation going back up to seven percent for 2020. He’s not forecasting interest rates going down, or into negative, despite excited stories of Danish bank Jyske offering negative interest rates.
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“This is not a forecast,” he warns. “This is an ‘if’ conversation, not a ‘when’ conversation.
While that makes for great headlines, but by the time fees and so forth are added back, he says, “retail rates haven’t gone negative, anywhere.”
Things like Government bonds, swap rates, ordinary rates and mortgages are still positive, 1 to 1.25 percent. An OCR could go negative, but Stephens points out that there’s a limit to that before cash hoarding takes over. In fact, some clever person has compared the cost of hiring a cave and security guards in Switzerland to paying a bank to hold your money and come up with a theoretical tipping point of -.75 percent.
Stephens and others point out that OCR drops do not mean a one-for-one drop in what banks are paying for their money, as already a good proportion of their funds come from transactional accounts which have no, or close to zero, interest. So the pass through to mortgage rates gets smaller and smaller, bottoming out around 1.5 percent. In theory.
Commenting in the New Zealand Herald yesterday after his return from the world’s central bankers’ gathering in Jackson Hole, Wyoming, Reserve Bank governor Adrian Orr says that their job is to keep inflation low and stable and for sustainable employment, and that interest rates are their main lever.
“First, the interest rate lever is blunt. It is not personalised,” he said. “Savers (investors) and consumers are treated equally, and are often the same person, doing various activities.
“Second, how you respond to lower interest rates is personal... So how you feel about low nominal interest rates personally comes down to which of the activities you may be involved in.”
He repeats that while home owners may feel wealthier, those outside are facing a higher price to buy and savers will now need to invest more actively.
Orr points out that the Bank’s role includes ensuring banks are financially robust. Mortgage Lab’s Rupert Gough observes that this has translated in recent months into banks getting tougher with lending.
“Mortgages used to be about interest rates controlling the housing market, but now there are more levers, such as LVR or tougher lending criteria. There is more onus on the banks to be tough.
“They look harder if you go into overdraft. They’re looking now at character as much as affordability.”
Gough says that banks’ stress tests are not what borrowers can afford now, but whether they can sustain payments if mortgages got to seven or even eight percent.
“People should be prepared. We tell them to ‘aim for eight’ so you can afford things as the market changes.”
Stephens points out that the bank doesn’t foresee a downturn becoming more severe or long lasting, as most central banks “should still have plenty of ammunition left.”
“But the ride will stop eventually – further in the future, we are forecasting a period of rising inflation, higher interest rates, falling house prices and a downturn in GDP growth.”
An upside is that as term deposits drop, funds flow into fund managers for other assets – Stephens points to the sharemarket going through the roof.
Mortgage Lab’s Gough, whose brokers also advise on KiwiSaver, says that savers are more likely to switch to mutual or investment funds unless they are close to retirement age when they can access funds at 65.
John Bolton of Squirrel Mortgages says that while borrowers are the winners right now, in the global context, things aren’t getting great. With $570 billion of household debt ($266 billion of that is housing debt), a slowdown in hiring workers and subdued retail spending, combined with slower population growth and net migration, the economy is sluggish.
That means savers could turn to more risky strategies to earn money to supplement their fixed incomes, exposing them to scams that wipe out their savings and even lose their homes, says Tom Hartmann personal finance editor and head of the Commission for Financial Capability’s fraud education team.
“People who traditionally lived off their nest eggs will now not have much to live off, so they’ll either dip into the nest egg or dial up the risk in order to make more.” Some $33 million was lost to scams in 2018, but Hartmann reckons that represents only a fraction of losses, and is likely to go up this year as vulnerable people get deceived by promises of better returns.
