It was probably one of the silliest ideas promoted by a politician in recent years: a proposal to put a levy of two per cent onto all fixed rate home mortgages in New Zealand.
It would have added an estimated $NZ200 a month to the cost of the mortgages on 1.2 million mortgage holders across the Tasman.
As a recipe for boosting inflation and more importantly, losing Government, it was a doozy from the normally clever Labor Finance Minister, Michael Cullen early Friday.
In policy terms a levy like this is a very crude piece of policy and harks back to the 1970s and beyond.
Within hours of telling NZ radio listeners that the idea, first mentioned in a NZ Treasury briefing document last year, was worth further investigation, the Labour Government went into reverse and by close of business on Friday, the idea was dead and buried.
And the country’s Australian owned banks can rest easy and keep competing madly in the home loan market.
Finance Minister Michael Cullen took everyone by surprise when he indicated early Friday that he was considering implementing a levy on fixed-rate mortgages to ease pressure on exporters suffering from the high kiwi dollar.
According to news agency reports from NZ he said the proposal would hit homeowners with substantial mortgages hardest, “and there’s a degree of inequity in that, but then that’s always been true of monetary policy”.
The proposed levy, of up to 2 percentage points that would be imposed when needed ,was included in a report from the Reserve Bank and Treasury released to the public in April last year.
It would push fixed-rate mortgages up from about 7.5 per cent to 9.5 per cent – roughly the same as current floating rates.
The increase would mean a homeowner with the average fixed-rate mortgage of $NZ150, 000 would pay an additional $202 a month.
Driving the proposal has been the preponderance of fixed rate mortgages issued in NZ for home purchases or re-financings.
NZ is in the midst of a resurgence in competition among the bid four Australian owned lenders to shovel money out into the housing market (it’s got the lowest capital weighting). NZ housing prices are rising and the Governor of the country’s Reserve Bank, Alan Bollard, has been unhappy at this boom and its impact on inflation.
He’s warned twice in the past month that rates are going to rise from the present 7.25 per cent because of the dangers of an upturn in inflation and the bubble in NZ house prices.
Of special irritation to him is the way the fixed rate mortgages weakens his ability to use interest rates as a quick and effective monetary policy lever.
Most fixed rates mortgages in NZ last for at least two years.
In Australia the overwhelming majority of mortgages are variable (around 80 per cent by some estimates) although there has been an upsurge in fixed rates, especially in the three year term, in the past year as the Reserve Bank moved to lift rates three times.
Bollard and other economic managers say the fixed rate mortgage means the booming housing market is almost permanently insulated from interest rate increases and that the impact of rate rises and currency appreciation, is being felt by exporters and others.
Bollard says it’s tying his hands from effectively controlling inflation.
It sounds like the idea of the levy was a policy kite flown out of frustration and not good economic or political thinking.
Kiwis now can look forward to official interest rates of 8 per cent perhaps by the end of the year. The next move may come on March 8.
