New Zealand housing bubble to bust economy

The International Monetary Fund (IMF ) has warned that rising interest rates poses an major threat to the New Zealand economy due to the country’s extreme exposure to the housing market.

The housing market was a risk because of the high levels of debt households were carrying, how vulnerable they were to rising interest rates and the level of bank exposure to that market…

But it said, despite that vulnerability, increasing interest rates was still appropriate.

The IMF’s concerns are justified.

After annual price growth peaked at an “unprecedented” 25% in 2021, house prices across New Zealand have fallen by 2.6% since November, according to ANZ Bank:

New Zealand house price growth

After the boom comes the bust.

Home buyer sentiment, auction clearance rates and mortgage commitments have all collapsed (see yesterday’s post), suggesting the floor is falling out of the New Zealand housing market.

A key problem facing the housing market is that one-third of mortgage borrowers in 2021 borrowed at a debt-to-income (DTI) ratio of six or more, equating to around $32.6 billion worth of mortgages:

New Zealand mortgage debt-to-income ratios

Recent New Zealand home buyers are very highly leveraged.

This makes these borrowers extremely sensitive to interest rate rises.

With the Reserve Bank of New Zealand (RBNZ) already tightening, mortgage rates across New Zealand have lifted sharply – by 2% for 3-year fixed rates and by 0.8% for floating rates:

New Zealand mortgage rates

New Zealand mortgage rates have already risen sharply.

New Zealand’s economists are tipping the RBNZ will lift rates by a further 1.75% (ASB’s forecast) to 2.5% (Westpac’s forecast), whereas the markets are tipping a further 2.5% of rate rises by the end of 2023.

Such a sharp increase in mortgage rates would place many New Zealand mortgage borrowers under extreme pressure and could drive a possible house price crash and sharp economic downturn.

The RBNZ will need to tread very carefully as it tries to balance inflationary risks with financial stability risks.

Unconventional Economist
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Comments

  1. TailorTrashMEMBER

    So those clapboard dumps in the ar$e end of Auckland might not be worth a million after all….

  2. Looks like our banks were not content to risk our economy they did the same to NZ too…..

      • TRADINGtheAPOCALYPSE

        Yes banks and bankers are extremely smart and altruistic and always have wider societys best interests at heart.

  3. “The RBNZ will need to tread very carefully as it tries to balance inflationary risks with financial stability risks.”

    Too late.

  4. kiwikarynMEMBER

    “Such a sharp increase in mortgage rates would place many New Zealand mortgage borrowers under extreme pressure”
    Not really, since the banks never dropped the serviceability test rate below 6%.
    https://www.stuff.co.nz/business/300030609/rates-are-under-3-so-why-do-banks-still-check-you-can-pay-7
    “At present the weighted-average test rate across the industry is just over 6%, which represents a margin of 5.5% above the OCR of 0.50%,” the Reserve Bank says.”
    https://www.interest.co.nz/personal-finance/113333/reserve-bank-launches-consultation-potential-debt-serviceability

    • Remember, consumption = income.

      Those serviceability tests don’t mean much, because they assume people spend (and therefore earn) as much as they did when rates were at the floor.
      In reality, if rates were to hit 6% in a relatively short period of time.. home owners would be toast.

      • “Not really, since the banks never dropped the serviceability test rate below 6%.”
        So you are saying the banks followed this rule? Self regulation, my ar.se

        • kiwikarynMEMBER

          The NZ banking system is so concentrated, and highly profitable, that no bank needs to go out on a limb and take risks. They have had the RBNZ breathing down their necks for several years now so they have been behaving themselves. In fact, the banks often reduce their lending risk before the RBNZ makes them – eg. ANZ has closed their cheap “back my build” lending programme now when the Govt funding doesnt stop until until December. They also stopped low LVR lending before the official changes came in. And this is why they are being completely anal retentive with the new CCCFA rules. There is also a voluntary clampdown on interest only mortgages, and they only take 65% of rent into account when calculating serviceability. I see more people complaining that they cant get a mortgage when they have good jobs and think they have no problems paying a mortgage, then I see people claiming to have bought six houses funded by a gig at a strip club (from my travels round the online property forums).

      • kiwikarynMEMBER

        That is true. Increasing rents as a result of increasing interest payments (exacerbated by the fact that its now non-deductible) will suck out disposable income as well. In NZ the lower-middle income people can get an taxpayer funded Accommodation Subsidy, so that will offset some of those rises.

  5. The average borrower is fine, their LVR is low and debt servicability isnt an issue. FHBs are more at risk.

    Please show the one year fixed as this is where people are fixing at.

    • As commented above by Rick-137, New Zealanders, just like everyone else, spend according to real disposable income. If they have it, they spend it. The fact that their debt was granted based on a theoretical future rate won’t stop them spending actual cash today.
      New Zealanders are in for a hard time, but many are just refusing to look at the facts – it might frighten them.

      • kiwikarynMEMBER

        In my circle of friends and family, several have offloaded rental properties in the past year and used the money to pay down their OO mortgages. People have realised that (a) interest rates are going up and (b) there is nowhere else to put the money that gives them a risk free 5% after tax return. The biggest problem I see at the moment is that a lot of people are being sucked in by the advertising of the multitude of single project property development investment funds – they are everywhere, and if any sector of the housing market is going to go belly up taking people’s life savings with them, it will be that one. The FMA really needs to start cracking down on them, I keep getting friends asking me about them. I tell them to steer clear.

  6. Hugh PavletichMEMBER

    United States …

    .. Can New Zealand expect aggressive mortgage interest rate lifts too … particularly with the extremely high risk worst affordability within the developed world … NZ circa 9.0x household incomes, Australia 7.0, USA 4.1 times overall according to US NAR ? …

    … We know what happened to Ireland following the ’07 event, when it went from 4.7 times to 2.8 …

    Mortgage Rates Surge to 4.42%, Highest Since January 2019 … Bloomberg

    https://www.bloomberg.com/news/articles/2022-03-24/u-s-mortgage-rates-surge-to-4-42-highest-since-january-2019

    Beleaguered house hunters are now watching mortgage rates spike, too … NBC

    https://www.nbcnews.com/business/consumer/mortgage-interest-rates-forecast-2022-analysis-rcna21286

  7. BoomToBustMEMBER

    Anyone remember the book “Boom to Bust”, I forget the authors, it appears they were right, like many if us, got the timing wrong as we did not understand how determined the banks and government were to kick the can down the road, it was always going to end badly, unfortunately the longer this event went on, the worse the end was going to be.

  8. Goldstandard1MEMBER

    Next stop: Australia.

    Same article/6 months. Auctions being pulled left right and centre here in inner East suburbs in Melb this Sat morning. You’ll see 76% clearance rate tonight but Auctions that were scheduled will drop by 40% vs what actually took place. Then 80% of those will be ‘undisclosed’ prices as they would signal INSTANT drops and they want us to find that out in 3 months. That delay will allow time to announce a ‘1st home owner Realestate developer and agent booster scheme’ that will slow the drops to single digits until after the election. Then BANG, all and I mean ALL, bets are off.

      • Lol, not the elites. Open teh gates, use super, restrict planning, shared equity loans, relax foreign ownership of residential property. The list could go on. How many times do your property price predictions have to be wrong before you realise this thing is government backed?

    • All the auction and properties for sale around us are all selling well about the quoted range. We are unfortunately in Melbourne. No matter who wins the election, the property market will be supported.