After all those promises relief is at hand

Press, 2 December 1987, Page 16

After all those promises relief is at hand

Christmas this year looks set to be very cheerful for mortgage holders, with a drop in mortgage interest rates and signs that the rates are at last on the way down. In the last few weeks almost all of the major financial institutions have an-, nounced reductions in their rates and representatives from the institutions say that further downward movements are likely. Tony Kunowski, corporate affairs manager for the United Building Society, believes that by April next year, rates could be as low as 14 or 15 per cent. “The opinion in the financial sector is that 14 or 15 per cent will be the interest rate by April, that is assuming that the underlying rate of inflation remains the same.”

This prediction is a Christmas present in itself for those with mortgages and those who are thinking of buying homes early next year. United has a high level of accuracy in its long-term forecasts of the mortgage market. Mid-1986, when other institutions — spurred by competition — dropped their rates to 17 and 18 per cent, United was a loner in the field, maintaining its rate at 19.25 per cent. Explaining the action when the interest rates increased again at the end of last year, Tony Kunowski said that the society’s economists had not believed that the low rates could be sustained long term — “. . . 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.”

Tony Kunowski also said then that he could not see mortgage interest rates coming down in the foreseeable future — a prediction that proved accurate when the rates increased again in February and remained at high levels throughout much of the year.

Late last week, other institutions were not so prepared to state what the rates may fall to, but most were sure that the long-awaited downward trend is there. The Countrywide Building Society, which is about to become the Countrywide Banking Corp, announced a 1.5 per cent cut in its mortgage lending rate on Friday, taking it to 19 per cent.

Peter Martin, the society’s chief executive, says the move signals Countrywide’s confidence in the New Zealand economy and in the Government’s success in controlling Inflation. “With inflation now running at less than 10 per cent, I expect that interest rates will continue their downward trend.

“We anticipate being able to review existing mortgages with effect from January 1, 1988.” The ANZ Bank is another institution citing the positive downward trend in inflation as a major contributing factor to the reduction in its mortgage rate. John Gardiner, the group’s public relations manager, says that the ANZ has dropped its mortgage rate by 0.75 per cent, effective from December 2. (Its rate for new residential mortgages is now 19.5 per cent). Inflation and the fall in the sharemarket, are the two big factors now influencing interest rates, he says. ; “The substantial decline In the sharemarket is affecting interest rates via its impact on levels of economic activity. “A downturn in economic activity cap be expected during the next year. This, combined with more conservative attitudes to borrowing following the shock to confidence levels, weakens demand for credit generally, so putting downward pressure on interest rates." John Gardiner explains that the sharemarket decline has also caused expectations of inflation to fall, “and interest rates should move down accordingly, even within a period of tight monetary conditions.”

United also believes the sharemarket fall will have a beneficial downward effect , on interest rates.

Tony Kunowski says the fall is likely to make people switch from more direct investments in shares and unit trusts to’ safer fixed rate securities such as term' deposits.

“This will increase the liquidity offinancial institutions which will create excess supply and put downward pressure on interest rates.

“Less confidence in the future after the fall will also have an effect on consumption because rather than use their money for. consumption, people will increase their saving," he predicts.