2014 is likely to be a tough year for debt
burdened home owners and businesses. As expected, last week the Governor of the
Reserve Bank left the Official Cash Rate (OCR) unchanged at 2.5%. Of greater interest
was his commentary.
The Governor has for some time warned
borrowers that interest rates will rise. Last week he was more specific. The
first of the interest rate increases is likely to be announced on 13 March 2014,
and rise 1% (100 points) in 2014 and by 2.25% over the next two and a quarter
years (through to mid-2016).
That means a family with a $200,000 mortgage
is likely to be paying about $40 a week more in interest this time next year,
and $85 a week by June 2016.
There will also be an immediate, and
potentially more severe impact on businesses. In my view the financing risks
businesses currently face has been largely ignored by the Reserve Bank and
central government, and gone unreported in the media.
A 2% interest rate increase would be the
final straw for those businesses already operating on paper thin margins and battling
declining sales. In 2014 a number of those businesses will have to do the
inevitable: tell staff the money has run out, close the doors, and in many
cases take a significant personal financial loss.
The Governor also had some interesting things
to say about house prices generally.
“Contributing
to rising house prices are low interest rates, a rise in net inward migration,
and region-specific supply issues. These sources of support are expected to ease
over the medium term…Further, restrictions on high loan-to-value (LVR) mortgage
lending, introduced by the Reserve Bank in October, are expected to reduce
annual house price inflation by between 1 and 4 percentage points over the next
year.”
In other words, the factors that have causes
property prices to rise are likely to ease, the LVR ratios will reduce house
prices (by how much is uncertain) and higher interest rates will dampen housing
demand. With those headwinds, property investors should not expect 2014 to be a
vintage year for capital growth.
Although the LVR restrictions were only
introduced in October (and have now been modified to exclude new builds), the
general effect has been for banks to split the pricing of their mortgages, with
low deposit borrowers paying a 0.5 percent interest rate premium (and
additional fees).
The general pattern for borrowers has been to
switch from floating to fixed rate mortgages. The Governor says, “At the end of October, the share of
floating-rate mortgages was 43 percent compared to 56 percent a year ago. Most
of the mortgage rate fixing has been for short terms, with the share of fixed
mortgages up to a 1-year term at 30 percent.”
With 73 percent of borrowers on floating or short-term
fixed rates the impact of rising interest rates on households will be
immediate.
There are many other important dynamics ahead
for 2014. The
prediction market, iPredict.co.nz, offers interesting forecasts on a wide range
of topics. Their predictions are based on the public making win or loss
(binary) bets, which have proven to be more reliable than opinion polls.
Offsetting the negatives above:
- The ipredict marketplace expects the economy to grow by 4%
in 2014. This is higher than the Reserve Bank’s projection of 3%, then slowing
in 2015.
- High dairy prices are likely to remain high. 61% predict the
Fonterra pay-out per kg of milk solids to be above $8 at least until June 2015.
- Unemployment is expected to fall in 2014.
- There is an 82% probability the Government’s finances will return to surplus in the 2014 Budget.
On the political scene, iPredict says there
is a 50% chance National will win the general election in November 2014. National
is expected to gain 41% of the vote, Labour 35%, Greens 10%, Conservatives
5.7%, NZ First 4.6%, Maori Party 1.5%, and the others less than 1%. Maori, Mana
and United are expected to win 1 electorate seat each. NZ First and ACT are not
expected to win an electorate seat and would therefore be out of Parliament.
Interesting times ahead for 2014, and
challenging times for those vulnerable to higher interest rates.
1 comment:
Yes, I read somewhere that over in Singapore there is now a 40% equity requirement for purchase of property. Also restrictions on foreign buyers.
Its kind of scary that the increasing interest rates will put people out of business.
On your political scene I see a drop in the Green vote and a pass for Conservative.
Is it just me, I would vote conservative in a flash if it will make a difference. Is it the NZ First votes that may transfer.
Mr Key has to offer Colin Craig a safe seat.
This country can not afford Green / Labour and so
I told Gerry Brownlee down here, I said 'I will make sure you win Christchurch Central if you give
Colin Craig a safe seat', and he laughed as though he knew something I didn’t.
Paul Scott
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