Tony Alexander: Banks are offering heavily discounted fixed rate deals on the quiet

ANALYSIS: In this week’s column I want to cover three things - monetary policy, banks competing for mortgage business, and new upward pressure on rents.

As had been widely expected in the financial markets before the recent weather events, the Reserve Bank raised the official cash rate 0.5 percentage points and noted that the pace of growth in demand in the economy still exceeds the pace of growth in supply of vital resources. Inflationary risks remain. They made it clear that they don't believe they have yet done enough to suppress inflation and that the recent flooding will, as many of us have been noting this past week, boost the pace of growth in the economy and inflation after the initial impact of a short term decrease in economic activity.

People on floating rate loans can anticipate their rates rising about half a percent in the very near future. With regard to fixed rate mortgages, scope for further declines in headline rates after some cuts recently now look reasonably remote but not just because the Reserve Bank is still standing staunch against inflation.

Economic data released in the United States recently has been much stronger than expected and this is leading to a growing view offshore and here that inflation is going to be more difficult to get down in this post-pandemic period than had earlier optimistically been thought.

But while bank fixed mortgage rates usually are set by banks in response to changes in wholesale borrowing costs there is another dynamic in play at the moment. Residential real estate turnover is falling to the weakest levels since the global financial crisis and banks are no longer meeting their mortgage sale targets. As a result, they are offering some heavily discounted fixed rate deals - but not advertising them.

For instance, one bank is offering a 4.99% one year fixed rate with no cashbacks. Another couple are offering a 5.99% rate for periods of 18 to 24 months but with up to a 1% cash back. Another is accepting applications where the deposit is less than 10% of a property’s valuation.

Competition between the banks has heated up considerably and is likely to remain strong over the next few months as real estate sales remain very subdued.

Independent economist Tony Alexander: “Residential real estate turnover is falling to the weakest levels since the GFC and banks are no longer meeting their mortgage sale targets.” Photo / Fiona Goodall

Finally, last week I listed seven reasons why first home buyers are returning to the housing market. One of those reasons was the continuing rise in rents and talk of rental shortages despite house prices falling. This week we have received extra confirmation of upward pressure on rents from the release of new figures on rental prices. We can also see new upward pressure on the pace of rental increases appearing in my monthly survey of residential property investors undertaken with Crockers Property Management.

On average over the past year and a half that I have been running the survey the average rent increase which landlords have said they will be trying to get has been 5.9%. In my final survey for 2022 the average desired rent increase fell to 5.3%. It is now back up at 5.7%.

In addition, two months ago 70% of landlords said they planned putting their rents up. That reading is now 74% which is close to the 75% average. Finally, two months ago a net 8% of people responding in the survey said that they were finding it difficult to get good tenants. That has now reversed with a net 2% saying that things are easy once more.

There are many substantial factors of changing magnitude now in play in New Zealand’s housing markets, and perhaps mention of a fourth to finish off would be wise. Net migration inflows into New Zealand have turned on a dime to +16,000 the past year from -14,000 six months earlier. Add in foreign students returning and there are pricing and occupancy implications for Auckland in particular.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz