Mortgage borrowing strategy

by ANZ chief economist Cameron Bagrie

While the housing market is recovering, it is off remarkable lows, and in itself is insufficient to alter our favoured borrowing strategy – which is being patient and taking advantage of low six month rates.

Our view is that aggressive competition for deposits is keeping pressure on borrowing rates. With the Rerserve Bank of NZ ‘telling’ banks to get more funding in place, there will be two broad consequences.
First, competition for deposits will remain intense, particularly for term funding. This will keep the curve steep. If depositors are being rewarded, then of course, the borrowers have to pay.

Second, this will remove the temptation for banks to fund aggressive demand for credit by issuing short-term debt, as was the case during the previous upswing. Reduced fuelling of the housing market via aggressive credit demand (and supply) should reduce the need to raise the Official Cash Rate as aggressively over the next cycle.

Collectively, these are key structural issues that impact heavily as we weigh up the relative attractiveness of different borrowing rates.

In this environment, coupled with intense political pressure that is being placed on the financial services industry, we maintain our bias towards short-term rates, the six month rate in particular.

Barry McKean
Residential Specialist