New Zealand's Muldoon lowers the boom on mortgage rates

After months of admonishing bankers and finance houses to lower interest rates on mortgages, New Zealand Prime Minister Robert Muldoon has moved to peg the rates by law.

It is now illegal to lend money on any building or land at more than 11 percent for a first mortgage and 14 percent for a subsequent mortgage.

Muldoon, who is also minister of finance, acted because many lenders, who had reduced their rates from the 18 percent and more that prevailed six months ago, had refused to drop them to the levels he thought they should be at.

His argument is that a wage and price freeze, introduced in June 1982, has slashed the annual inflation rate from 18 percent to 5.4 percent. Interest rates should drop accordingly, he said.

The government itself had acted to reduce interest rates. A government savings certificate introduced earlier this year offered 15 percent interest to investors. Designed to mop up excess liquidity in the economy, it attracted hundreds of millions of dollars before being withdrawn. Now the government certificate interest rate is 8 percent.

Muldoon has had his eyes particularly on lawyers, who traditionally supply a substantial proportion of New Zealand's mortgage money by investing clients' funds - especially for second mortgages which attract a higher return. Several weeks ago he drew up regulations imposing limits, and warned lawyers that their rates were not low enough. He acted the day after he received the results of a Law Society survey he requested, which showed that lawyers were still lending mortgage money at 14 to 16 percent.

Law Society president Bruce Slane said finance companies were still lending money at 17 and 18.5 percent, so the lawyers' rates were not out of line. But Muldoon was not convinced. So he introduced the regulations, saying they could stay in effect for up to a year, or ''until we are satisfied the interest rate is stable at a reasonable level.''

Inflation is expected to drop to under 4 percent by year's end, ''so we are still looking at the highest real interest rates we have seen for a very long time,'' he said.

Finance houses said investors would go elsewhere for higher returns on their money, provoking a shortgage of housing money. The real estate industry warned that the move would boost housing prices.

Muldoon also faced some criticism from promoters of free enterprise in his Conservative National Party, who oppose further government intervention in the economy.

But Muldoon remains unbowed. ''We have a unique opportunity at the present time,'' he said. ''We still have a freeze in place and we have an adequate supply of money in credit, very little demand, and a general downward trend in interest rates anyway. What we are doing is simply hastening that trend.''

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.