Kiwi home loan resets should ease pain

Wave of Kiwi home loan resets should ease households' pain

• RBNZ officials are “disappointed” banks are not passing on official cash rate (OCR) cuts
• Fixed mortgage rates, however, are about to be reset at much lower levels
• Lower effective mortgage rates and stabilization in housing market should support consumer spending

New Zealand experienced an unprecedented housing boom between 2001 and 2007. House prices surged over 90%, before beginning to fall in early 2008. The weakness that emerged in the housing sector early last year quickly spread into other areas of the economy, which soon began to contract. GDP since has fallen for five straight quarters. The homegrown recession was compounded by global woes offshore. The worst of New Zealand’s economic troubles, though, stemmed from long-running, heavy reliance on household debt that was exposed by global recession.

In response to the recession, the RBNZ began cutting the OCR aggressively in June 2008, and since has delivered an unprecedented amount of policy easing—the OCR has been slashed from 8.25% to a record low 2.5%. Effective mortgage rates, though, fell less than the OCR, owing to the predominantly fixed-rate mortgage structure in New Zealand, and the reluctance of banks to pass on reductions in the OCR to floating rate mortgages. Homeowners should feel some relief in 2H09 as house prices stabilize and a significant number of fixed rate mortgages reset at lower levels.

For a copy of the report click the link below:

http://img.scoop.co.nz/media/pdfs/0907/NZ_mortgage_structurepdf.zip

ENDS

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