Mortgage interest rates in 1987: up, down, or steady?

Press, 24 December 1986, Page 13

Mortgage interest rates in 1987: up, down, or steady?

In her last In Residence column, SARAH SANDS reviews the interest rate dramas of this year and consults the sages on our prospects for the new year.

An increase in mortgage interest rates this month has given little Christmas cheer to mort-gage-holders. While the changes were relatively small — between 0.5 per cent and 1 per cent — they came with a warning from financial institutions that further increases could follow.

Mortgage interest rates tend to mirror the rates attracted on the government stock tenders and in the last two months these have gone from 15.6 per cent to 17.4 per cent. Few people are willing to predict what is likely to happen to these rates. Earlier this year, the Minister of Finance, Mr Douglas, said that while the market would be volatile, the general trend for interest rates would be down.

So far, this seems to be a fairly accurate prediction. In February this year, interest rates peaked at 21.5 to 23.5 per cent for first mortgages and 22.5 to 26 per cent for second mortgages. (Trading bank rates were less but money was tightly restricted to long-time customers only).

Even after the latest increases, interest rates now are still lower than in February, with a peak of 19.25 per cent for a first mortgage and 21.5 per cent for a second mortgage. Some financial institutions are cautiously predicting that these are the levels at which interest rates may stay for some time. The ANZ Bank increased its interest rate 0.5 per cent on December 8 and is looking at the rates again. But Mr Peter Hazael, ANZ’s marketing manager, doubts there will be much change after this because the bank believes rates are generally on a downward trend.

“Retail deposit rates are still rising so there is a problem there but generally our economists say that mortgage . interest rates will keep on the straight and narrow.” He says a small increase may be necessary

in the immediate future to reflect what has happened to retail interest rates in the last two months but this will be all.

“So, I can’t offer much consolation to home owners that rates will continue to go down in the immediate future — they will either stay where they are or have a small rise.”

Mr Frank Dickson, general manager of Trust Bank Canterbury, also believes that Mr Douglas’s prediction on interest rates may still be true but is nonetheless cautious. “I think I know where the (Government) policy is leading but whether it gets there is another question.

“The market is saying that it has some concerns about the deficit both internally and externally. The impact of this is that even those skilled people with strong opinions are not unanimous in the way they see the future shaping.

“I think that the pressure is still downwards

but the horizon may have shifted a little bit — there is less certainty about the timing.” In the latest round of increases, both the BNZ and the National Bank decided to ride out the storm and held their rates at the present levels. However, both are uncertain how long it will be

possible to do this. The National bank is making no promises for the future and says the market will decide what the bank’s rate will be. Mortgage interest rates at the BNZ are in the “lap of the gods.” Mr John Mac Gibbon, chief manager of BNZ, New Zealand business division, says that the bank is trying to hold its rates but it is inevitable that its base and commercial rates have to move. “To what extent we can continue to hold mortgage rates is in the lap of the gods.” The only financial institution to retain a relatively high interest rate throughout the last six months is the United Building Society and the corporate affairs manager, Tony Kunowski, says the latest increases in rates show the reason why.

“The increase in rates is exactly what we suspected would happen. “We have economic advisors who look at the

long term trends and it was pretty obvious to us that the leading indicators were not moving far enough or fast enough to show that the rates at which interest rates dropped earlier could be sustained.” ‘ 1 ’*>'l

While from a structural point of view it was not good to drop the rates only to increase them again, the society would have done so, if necessary, to keep in touch with the market.

“If we had found that demand had dropped back (when the society rate was 19.25 per cent and rates at other institutions were much lower), we would have followed with lower rates. But we found the opposite to that.”

Mr Kunowski says this shows that most people are prepared to pay the price to get the money and good service.

He cannot see rates coming down in the foreseeable future.