THE PRESS SATURDAY, JANUARY 21, 1984. Low interest in housing

Press, 21 January 1984, Page 14

THE PRESS SATURDAY, JANUARY 21, 1984. Low interest in housing

The State in New Zealand has not yet devised a way to compel people to invest their savings with private institutions. When alternatives for investment are available, institutions have to be able to offer competitive rates of return if they want to capture the new funds they need. Without those funds, lending for such things as houses must eventually be limited, and may have to stop for a time. These facts of economic life are being challenged by the Prime Minister in his renewed assertions that interest rates, and particularly those on house mortgage loans, have not yet fallen far enough. The rate of interest that an institution can afford to charge a potential borrower is determined, in large part, by the rate that the institution must pay to acquire the money in the first place. When depositors are reluctant to lend, sources of loan money dry up. The normal response must be to increase the rate of return offered to lenders. To finance that return, an appropriate rate—slightly higher—has to be charged to those seeking loans.

Sources of mortgage finance are caught in a squeeze between the drive for lower interest rates that the Prime Minister says is desirable, and the reluctance of investors to provide money. The squeeze is having unhappy repercussions, not only for people who find there is no mortgage money available from traditional sources, but for the country as a whole.

A building boom in New Zealand is more than an expression of a buoyant economy; such booms have generally been produced and sustained, in large part, by a substantial increase in building activity. New housing produces demands for a wide range of goods and services, far beyond those directly needed for putting up a new building. An upsurge in house building, and adequate access to the loan money that makes it possible, have an important place in any plan for sustained economic recovery in New Zealand. The Prime Minister is not necessarily mistaken in his attempts to keep interest rates as low as possible for people seeking housing finance, and for all other enterprises that rely on borrowing. The significance of high interest rates as an effect of inflation, and as a stimulant to further inflation, cannot be disregarded. With inflation down to 4 per cent for the last 12 months, Mr Muldoon has reason for maintaining that interest rates of up to 14 per cent on new mortgages are too high. They are onlt too high, however, if inflation is going to remain under control and if returns from other investment are not more attractive. The habit of expecting high inflation is entrenched in many New Zealanders, in spite of events during the 18 months of the freeze on incomes

and prices. The ability of lending institutions to lower their rates of interest to borrowers depends on lowering the average cost of the money obtained from depositors. Ordinarily, existing loans will take care of earlier borrowings at higher interest rates. Provided that new deposits can be attracted at lower rates, new loans can be made at lower rates. The obvious problem is that depositors have not yet been persuaded that lower rates are here to stay and that they might as well accept them. Shortterm deposits may be made at lower rates; but the lending institutions cannot count on these for long-term lending. The process of lowering interest rates is therefore much slower than the process of raising them.

The solution lies in the ability of the Government, and of the Prime Minister especially, to convince the community that inflation has been properly beaten, not just suppressed. That cannot be known, at least until some months pass with the restraints of the freeze much relaxed. Investors respond quickly enough when interest rates go up. They are much slower to accept that interest rates have come down and will stay down, especially while uncertainty about inflation remains. Sir Robert Muldoon may find, after the experience of some months of lower interest charges, and steady prices, that investors accept finally that they are not going to be better off by hanging on and waiting for higher returns on deposits. The State, through its own financial institutions, can lead the way on lower interest rates. If the State limits its borrowing, and does not compete strongly for loan money—as, indeed, it has been competing in the last two or three years—the private market will stand a better chance of settling down. The private market is bound to look ahead to the effect of Government borrowing and, if the supply of money is going to be kept tight, private institutions must look with some fear at what kind of Budget deficit will have to be financed this year. The chances are that, given the uncertainty of expectations, and given the certainty of Government borrowing, Sir Robert’s remarks on interest rates should be taken as more than a general observation. They should be taken as a warning that some kind of control will be applied to force rates down still further. This will be a delicate course to follow because, although it is possible to put a ceiling on lending rates, it is not possible to force people to lend to the institutions. The country’s businesses, and the mortgage market for individuals, may welcome lower interest rates: they will not, however, welcome a drying up of investment money at the same time.