Soaring mortgage rates pummel New Zealand’s housing market

Data released on Friday by the Reserve Bank of New Zealand (RBNZ) revealed that mortgage growth has collapsed across New Zealand.

After rising a whopping 128% in the year to May 2021, annual new mortgage commitments fell by 23% in the year to February 2022 in trend terms:

New Zealand mortgage commitments

Mortgage commitments move from boom to bust.

This decline was driven by a sharp turnaround in investor mortgage commitments, which swung from growing by 116% in the year to May 2021 to plunging by 47% in the year to February 2022:

New Zealand investor mortgages

New Zealand property investors rush for the exits.

Given the overwhelming majority of New Zealanders purchase homes with a mortgage, the slump in finance commitments is a bearish indicator for house prices.

Independent economist Cameron Bagrie says the decline in mortgage commitments was inevitable after the insane boom that took place in 2021.

Bagrie claims a “ridiculous” amount of mortgage lending took place in the second part of 2020 and the first eight months of last year. This meant the “monstrous” level of home lending taking place was never sustainable.

“There is a lot more going on. There are loan-to-value ratios, banks tightening up on risk capacity, some banks imposing debt-to-income ratios, tighter servicing criteria, and also rising mortgage rates”, Bagrie said.

Meanwhile, New Zealand economists are warning that rising mortgage rates will further dampen mortgage demand and house prices.

A Bloomberg survey of economists are tipping that the interest rate on a two-year fixed mortgage will rise to 5.5% by the end of 2022, with one-year fixed rate mortgages climbing above 5%.

New Zealand mortgage rates

New Zealand mortgage rates are set to soar.

The majority of New Zealand mortgages are on fixed terms rather than floating rates, and around 80% of current fixed rate mortgages – many originated at rates below 3% – are due to expire over the next two years, according to Bloomberg.

Economists are also tipping the RBNZ will raise the official cash rate from its current level of 1.0% to 2.5% by November, which will also lift floating mortgage rates.

The prospect of sharply rising mortgage rates leaves New Zealand households and the economy exposed.

As noted by Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland, “the New Zealand economy has been famously described as the housing market with an economy attached. [Rising interest rates] has massive implications for how households behave”. As such, “there’s a wealth impact on consumers’ willingness to spend”.

Two of New Zealand’s major banks – ANZ and BNZ – are now forecasting a 10% decline in house prices in 2022.

But if interest rates rise another 2.5% by the end of 2023, as forecast by Westpac and the financial markets, then the expected house price correction could easily turn into a more severe crash as Kiwis are placed under severe mortgage stress.

Unconventional Economist
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Comments

  1. Hugh PavletichMEMBER

    Independent global economic researcher Capital Economics says some countries’ housing markets look vulnerable to ‘even a modest rise’ in interest rates – and the New Zealand market is pinpointed as one for particular concern … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/property/115057/independent-global-economic-researcher-capital-economics-says-some-countrys-housing

    Housing markets in some parts of the world are looking vulnerable to “even a modest rise” in interest rates – and New Zealand is pinpointed for attention in new research done by independent global economics researcher Capital Economics.

    Capital Economics senior economic adviser Vicky Redwood says property markets “are the weak link” when it comes to the impact of tightening monetary policy.

    “A modest rise in interest rates might only cause price falls in a few obvious candidates. But rates might have to rise only a bit further than we expect to cause more widespread falls. While this would not cause a second global financial crisis, it would still weigh on economic growth in the countries concerned and could cause interest rates to start falling again in some places. … read more via hyperlink above …

    Immigration reversal: Kiwibank expects net 20,000 people will leave NZ this year … Tom Puller – Strecker … Stuff NZ

    https://www.stuff.co.nz/business/128187242/immigration-reversal-kiwibank-expects-net-20000-people-will-leave-nz-this-year

    Kiwibank economists say exit of people from NZ could be similar to the Aussie mining-fuelled outflow back in 2011 … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/business/115060/kiwibank-economists-say-exit-people-nz-could-be-similar-aussie-mining-fuelled

    Kiwi Home Owners Face Soaring Mortgage Repayments as Rates Jump … Bloomberg

    https://www.bloomberg.com/news/articles/2022-03-25/kiwi-home-owners-face-soaring-mortgage-repayments-as-rates-jump

  2. TRADINGtheAPOCALYPSE

    HAHAHA LOSERS!! Could never happen in Australia because we have an extremely financially savvy populace, a switched on government and treasury, and our banks are unquestionably strong and great and also our central bank bubble managers are all very genius!

  3. TailorTrashMEMBER

    If pummeling is 10% ……I can take it ……said your average savvy investor ……this thing is now gone to fantasyland ……
    It will take something more to break it ………….

  4. “But if interest rates rise another 2.5% by the end of 2023, as forecast by Westpac and the financial markets, then the expected house price correction could easily turn into a more severe crash as Kiwis are placed under severe mortgage stress”
    Is this a bad thing?

  5. Most property owner in New Zealand today have never seen a property crash, close up.
    They’ve read about it, of course, but never experienced it, and so honestly believe that it can’t happen here.

    It’s going to.

    Coincidentally, the most recently ‘retired’ leader of our Opposition political party has just put his multi-million dollar home on the market. Now, there could be any one of a dozen reason that he’s done that, but one of them isn’t “Because he thinks house prices are going to rise from here”. And given that if his party usurps Ardern’s at the next election – still unlikely, but – does he know what policy his party is formulating? I guess we’ll never know.

    • Narapoia451MEMBER

      When I tell some people in NZ a correction is coming – like it always does, e.g. Spain and Ireland, they always say ‘But NZ is nothing like Spain or Ireland’. When I point out that that is correct – the bubble is actually far, far worse in NZ it’s information that hits people’s eardrums but is apparently not transmitted as meaningful information to the brain. It simply does not compute.

      Australia’s turn will come.

      • Not entirely. AU and NZ are sovereign currency issuers, Spain and Ireland were not when the GFC hit and were dependent on the EU for a response which didn’t come. TFF is an example of the “all stops” approach the RBA and RBNZ can create as currency issuers.

        I cannot imagine a time when interest rates are above 4-5%. If they are that high it will be because the economy is flying. The CB’s know if they raise interest rate too far they will crush consumer confidence and discretionary spending, both things which will create a mega recession. If they create a recession, guess what happens….they drop the rates.

  6. A mild housing correction forecast by local bank economists. Hmm… not like theyre conflicted or anything…

    • Jumping jack flash

      The banks have the most to lose here, they’re the ones who have secured trillions of dollars of debt against the prices of houses that magically grew from the action of securing debt against them.

      There was never a shortage of housing in the truest sense, just an inability of housing supply to keep up with the economic foam of fake debt demand when debt was cheap and abundant. And it isn’t only houses, it is everything.

      • Totally agree. And when the going got tough they just opened the immigration tap. But with China facing its own housing crisis and their border closed, that option is no longer available. And with the Fed set to hike aggressively, the writing is on the wall.

  7. So if you had 100,000 mortgage commitments for the year it then went to 228,000 the following year and then back down to 175,560, which is still 75% over where it was before the boom! Crash just getting started.

  8. kiwikarynMEMBER

    What is a crash? House prices have gone up 30% a year for the past 2 years. Some areas even more – going by sales this week mine has doubled in price in 3 years. A 10% reduction would take us back a couple of months. A 30% reduction takes us back 12 months. A 50% reduction and we’re still ahead of 2019 prices.

    • Jumping jack flash

      Yes it is interesting. A true “crash” would put houses (and demand and wages alike) back to 1990s levels, or at least using the same rules, restrictions and multiples that were implemented back then with regards to debt availability and eligibility. This was before the cheap debt skewed the whole economy and added that fake layer of debt foam on top.

      However, if you consider how many trillions of debt dollars have been churned over in the economy since then, there is a long wait for the whole system to unwind from the fake debt demand. If they choose that option it won’t be a lost decade, it’ll be a lost century.

      Or, on the other hand, they could crash and raze the whole current system based around the petrodollar, and set up a global carbon-backed currency or something like that. Kind of like a great reset, for want of a better term…

      My conspiracy theory sense is tingling.