US Recovery Has Negative Effects on New Zealand Housing Markets

By Roger Baettig | March 20 2012 8:55 PM

In the last month global investors have begun selling down their holdings in safe haven assets such as US Treasuries, on the back of improving US economic data including better- than-expected employment and retail sales figures.

Sponsorship Link

That has seen yields, or the risk premium demanded by investors to hold a bond, rise. Interest rates on 5-year US Treasuries recently reached 1.112 %, near their highest level since October.

That had implications for yields on equivalent-dated New Zealand bonds because they tended to move in tandem, Christian Hawkesby, head of fixed interest at Harbour Asset Management, said.

New Zealand's longer-term fixed mortgage rates are set to begin climbing as local banks find their wholesale funding costs going up amid an improving US economic outlook.

On top of that, the interest rates at which banks could borrow money tended to be influenced by long- term global interest rates.

To the extent that the US is leading the march higher you tend to expect wholesale rates to follow suit, and then eventually for those increased costs to be passed onto fixed mortgage borrowers.

width=150 The yield on the New Zealand 5-year government bond recently traded at 3.805%, near a five-month high.

ANZ National, ASB, Bank of New Zealand, Kiwibank, and Westpac all offer 5-year fixed mortgage rates of 6.9% a year.

Those rates are broadly tipped to rise as the US recovery gathers steam.

Speaking at the close of the latest Federal Open Market Committee meeting last week, Fed Chairman Ben Bernanke acknowledged moderate economic growth ahead, an improvement on the moderate expansion seen in January, although risks still persisted.

While US 10-year Treasuries were at 2% and [expected] to remain there for a long period of time, investors had an incentive to scour the world for places perceived to be low risk.

In an environment where global interest rates are heading north, that incentive is lessened because you can get that at home.

The message from banks on whether to lock in rates has been mixed. width=150

Westpac chief economist Dominick Stephens recently urged customers to consider fixing for terms between 2 and 4 years, while ANZ economist Cameron Bagrie suggesting a wait- and-see approach, pending further signs of an improving macroeconomic picture.

The price pressures are specific to longer-term fixed mortgages at this stage, with floating mortgages likely to remain on hold for longer as they track the 90-Day Bank Bill rate.

Reserve Bank Governor Alan Bollard signaled in this month's Monetary Policy Statement that the OCR is likely to remain at the historically low level of 2.5% until at least the end of the year.

So it seems that a US economic recovery isn't a good thing, for the NZ housing market.