AI Boom Drives Market Surge Amid Central Bank Policy Shifts

Highlights:

• Central Bank Divergence: Inflation trends varied globally, with the ECB, Switzerland, and Canada cutting rates while the Fed maintained high interest rates.
• AI and Market Dynamics: AI-related stocks, particularly Nvidia, led a bull run in US equity markets, with Nvidia briefly becoming the world's most valuable company.
• Australian Economic Outlook: A surge in inflation to 4% in Australia led to heightened market expectations of a potential rate hike by the RBA, with a critical meeting scheduled for August.

Surge in Six-Month Fixed Mortgages

In anticipation of potential interest rate cuts, mortgage borrowers significantly increased their uptake of six-month fixed terms in May, setting a new record. Data released on Wednesday, July 10, 2024, shows that many banks now expect the Reserve Bank to reduce the Official Cash Rate (OCR) by November, driven by a stalling economy, rising unemployment, and falling inflation within the 1-3% band.

Historical Highs in Short-Term Borrowing

Recent figures from the Reserve Bank of New Zealand (RBNZ) indicate that 17.1% of owner-occupiers chose six-month fixed terms, a significant jump from last year's 3.4%. This shift highlights borrowers’ expectations of imminent rate cuts. Investor borrowing on six-month terms also saw an increase, rising to 21.7% in May from 18.7% in April.

Popularity of One-Year Fixed Terms

Despite the rise in short-term borrowing, one-year fixed terms remain the most popular among borrowers. For owner-occupiers, these accounted for 36.5% of new lending in May, although this was a decrease from 39.4% in April. For investors, one-year terms made up 40.2% of new lending, down from 45% in April.

Overall Lending Trends

Total mortgage lending in May reached $7.1 billion, marking an 18.5% increase from April and a 22.8% rise compared to the same month last year. The share of new residential lending on fixed interest rate terms rose slightly to 82.3%, up from 81.9% in April. Owner-occupier lending climbed to $5.2 billion, while investor mortgage lending increased to $1.8 billion.

Stability in Long-Term Fixed Terms

Long-term fixed terms remained relatively stable, with two-year fixed mortgages rising to 8.8% and three-year terms increasing to 3.1%. However, floating term loans for owner-occupiers decreased from 17.7% in April to 17.1% in May. For investors, the share of 18-month terms rose to 11.9%, while two-year fixed terms fell to 5.9%.

In commercial property lending, investment property loans dropped by $72 million to $473 million, while commercial property development loans surged by $86 million to $174 million. Conversely, residential property development loans saw a slight decline from $98 million in April to $96 million in May.

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