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How Will The Increase In The OCR Impact On Home Loans?

Contributor:
Brian Dalley
Brian Dalley

Has Alan Bollard put pressure on banks to hold rates and lower their margins by increasing the OCR or, will it be business as usual, OCR goes up, retail interest rates go up?

I guess it doesn’t matter what we think, as what is done is done, but one can still wonder why, question, and hasten a guess as to the reasoning why Alan Bollard opted to increase the Official cash rate, (the rate which impacts on retail home loans).

For if you read the following statement, Reserve Bank raises OCR to 3 percent it doesn’t really give justification to the rise.

So why did he do it? This is only a theory but I would like to put it out there for debate.

If Bollard had left the rate unchanged that would have had very little impact on the housing market. It may have helped the business sector a little but not a great deal and would have had little impact on our economy as a whole so he didn’t have much to gain either way or did he.

Let’s take a look at a few statistics first. The home loan floating rate in June 2008 was 10.90%, June 2009 6.44%, June 2010 6.24% and today, the beginning of August 5.95%.

Looking at these figures both the Reserve Bank and Retail Banks could easily get away with a rate hike however; there are other statics that will be worrying for banks.

Records show the number of home loan approvals in July 2008 at 6147, July 2009 at 6497 and July of this year at an all time low of 4965. These figures must be of concern to the banks as they have a tendency to raise the bar on sales figures and growth irrespective of market influences.

So will the 628,000 homeowners who have floating mortgages be expected to pay more? And if so will that alone be enough to satisfy the banks appetite for healthy bottom lines or will they be forced to hold rates and reduce margins in an attempt to stimulate lending volumes.

Over the past months we have already had the HSBC reducing margins to attract the high end lending (above $500,000) and KiwiBank reducing margins and increasing their flag-waving.

Will this lead to a round of bank wars as seen when the BNZ took on the industry a few years ago with the unbeatable taunt, I guess only time will tell. I would hasten to bet with the rugby world cup fast approaching KiwiBank could very well try to further capitalise on their origin.

What has happened is that it has given the Reserve Bank breathing space, something they haven’t had for some time.

Will the rise in the OCR encourage more people to fix? Many are saying despite the risk of further rate hikes floating rates are just too good to pass up.

I guess when the Reserve Bank says further increases are likely to be more moderate than projected in June because the global economic recovery is still fragile, such statements make some sense.

The economy is showing some positive signs of growth; the export sector is doing well and commodity prices are high, but to see any major improvements the onus lies with the consumer.

“Consumers are really not ramping up spending and we think that's to do with the soft housing market, changes to the GST, the prospect of further interest increases, and seasonally adjusted figures.” So will this all change when the sun comes out. Will the summer months make things any brighter?

Naturally, it will, however it will unlikely make decision making any easier so why not make any life style changes and decisions now.

You could split your loan into a combo of fixed and floating if you are concerned about how an increase could affect your lifestyle.

As to when to buy or sell, that simply comes to reasoning and affordability. As mention above, to see any improvement the onus lies with the consumer, so the decision is yours and yours only.

There will be those that feel much of what I have had to say is only speculative, but that’s ok, I am trying to start a conversation and encourage discussion, not have the last word, leave a comment of email me directly: brian@propertyprofit.co.nz

Brian Dalley is a former NZMBA Mortgage Broker, Property Investor, and Real Estate Agent with over 15 years experience in the industry.  You can read more of his and other professional’s views and opinions on his website www.propertyprofit.co.nz.  

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