1. Borrowers continue to shop around
One issue that I covered briefly last week but which probably deserves a bit more detail is the popularity of bank switching at present. According to the Reserve Bank, around 3500 existing mortgage borrowers changed their bank in June, with a value of about $2.5 billion. These were both record highs for the data series which goes back to 2017.
Clearly, this decision shouldn’t be taken lightly, as it would be difficult to be sure over the life of a loan whether the new or old bank would have the best interest rates, terms and conditions etc. And a switch of lender may also involve extra costs such as legal fees or a new property valuation. But the data shows that many people are still deciding the benefits to them outweigh the costs, with the drawcard being the cashbacks being offered – perhaps as much as 1% of the loan value.
Of course, the ability to take this course of action without a break fee (or at least not a very large one) is also greater than it’s been for a while, because many borrowers recently have been opting for floating rates or lining up more of their ‘loan chunks’ on short-term fixed rates. With around 40% of current mortgages due to roll over in the next six months and another 10% or so on floating rates, this switching behaviour may remain a feature for a while yet.
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2. Not much to write home about in the economy
Meanwhile, last week’s economic releases reiterated the struggles we’re currently facing. The NZ Activity Index from Stats NZ is pointing to a soft GDP result for Q2, while ANZ’s business confidence measure for July had a softish tone. I always try to find the positives but it’s just a bit difficult at the moment when you look across a range of indicators. That said, at least the inflation measures from ANZ’s survey eased, helping clarify the case for an OCR cut on August 20.
3. Non-performing mortgages remain controlled
Similarly, if you’re trying to find positives, another cut of the Reserve Bank’s June data on the mortgage market shows that only 0.7% of borrowers are non-performing, i.e. either in arrears or being regarded as impaired (where the bank might not ever get their full interest or principal repayments). Granted, that figure has risen from 0.5% a year ago, but at least it’s not rising to the extent that you might typically associate with the underlying weakness of the economy.
Cotality chief economist Kelvin Davidson: “There’s been a focus on floating and short-term fixed interest rates.” Photo / Peter Meecham
4. Borrowers still hedging their bets?
In addition to high-quality serviceability testing (which may have prevented problem loans from even being advanced in the first place), one reason why many households have managed to negotiate their way through the recent cost-of-living pressures and avoid loan non-performance is that there’s been a focus on floating and short-term fixed interest rates. This has allowed them to quickly ride the wave down – and ease cashflow pressures – as market rates have dropped. This week, the Reserve Bank will update the lending data split by loan term chosen for June, and it seems likely there’ll still be a bob each way, with borrowers taking a bit of floating, but also locking some in longer too as they try to secure a bit more certainty as well.
5. At the peak for the unemployment rate?
Finally, the key economic release for the week will be Stats NZ’s labour market figures for Q2 on Wednesday. The unemployment rate may well have risen from 5.1% in Q1 to perhaps 5.3% now, which obviously isn’t great. But it would add to the case for an OCR cut on August 20 and when the economy eventually responds to monetary stimulus, we should see unemployment start to drop.
– Kelvin Davidson is chief economist at property insights firm Cotality