“Mortgage earthquake” erupts under New Zealand’s housing market

Over the past year, New Zealand’s floating and fixed mortgage rates have risen sharply, as illustrated in the next chart:

New Zealand mortgage rates

New Zealand’s mortgage rates are on the rise.

As at the end of March 2022, New Zealand floating mortgage rates had risen by around 0.6% from their June 2021 low, whereas both the 3-year and 5-year fixed mortgage rates had soared by around 1.9% from their respective lows.

Interest.co.nz’s David Hargreaves now believes a “mortgage earthquake” is about to erupt under New Zealand’s housing market, with households facing “enormous increases in mortgage payments”:

This is going to be like a kind of rolling mortgage earthquake…

Someone who took out a 30-year mortgage last May (2021) fixed for a year, and who is now looking to refi, could find their monthly payments will go UP BY EXACTLY A THIRD…

In dollar terms someone who took out an ‘average-sized’ mortgage ($329,000 as of May 2021) could face an increase in their monthly payments of $419 (over $5000 for a year). An ‘average-sized’ first home buyer mortgage ($548,000 as of May 2021) would cost an extra $698 a month (well over $8000 for a year)…

These examples are both based on ANZ and BNZ rates (given their, at time of writing ‘market leading’ hikes). In May 2021 both banks offered one-year ‘specials’ at 2.25% and now both are offering 4.55%…

We inflated our housing market by 40% between the start of the pandemic in 2020 and the end of last year. And of course we inflated the size of mortgages similarly. They are now huge… Now there’s people out there with seven figure mortgages…

The pain of homeowners is likely to be shared around, simply because of the outsized role in the New Zealand economy the house market plays. Where the homeowner suffering goes the economy will follow.

Those bigger mortgage payments are going to see reduced spending in the economy. Some people might put their houses on the market, thus increasing the slump already starting to emerge.

A fortnight ago, the Reserve Bank of New Zealand (RBNZ) shocked Kiwi economists when it lifted the Official Cash Rate (OCR) by 0.5% to 1.5%.

The RBNZ’s February Monetary Policy Statement (MPS) also saw the OCR increasing to 2.2% by the end of this year and by 3.3% by the end of 2023.

The next table highlights the impact of these actual and projected interest rate increases by comparing monthly mortgage repayments on the median priced New Zealand home at the trough of the interest rate cycle (i.e. June 2021) with repayments at the end of March 2022 and the projected increases outlined by the RBNZ. This analysis uses average floating mortgage rates, which are assumed to rise in line with the RBNZ’s OCR projections.

New Zealand monthly mortgage repayments

As you can see, monthly mortgage repayments on the median priced New Zealand home had already increased by $520 between June 2021 and March 2022. Repayments are projected to rise by a further $540 by the end of 2022 and then by another $520 by the end of 2023.

Thus, if the RBNZ’s OCR forecasts materialise, then the typical New Zealand household buying the median priced home would pay $1,580 more in monthly mortgage repayments than the median household paid in June 2021 and $1,060 more than the median household paid in March 2022.

The rise in monthly mortgage repayments would obviously be steeper in Auckland ($1,421 a month) and Wellington ($1,190 a month) between March 2022 and end-2023, given these markets are more expensive than the national median.

Regardless, New Zealand’s army of highly indebted households are facing an acute interest rate shock, with some recent buyers also facing the prospect of negative equity as property values fall below their purchase price.

Given the outsized role that housing plays, the pending escalation of mortgage repayments and property price falls also risks stunting the New Zealand macro economy.

Unconventional Economist
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Comments

  1. They should vote for our Clive and the UAP in the forthcoming NZ elections.
    That will fix the rates.

  2. It’s lucky our Aussie banks have no exposure to that. Otherwise you might get credit tightening against the RBA’s will!

    • Aussie banks pretty secure. NZ is a full recourse mortgage market and apart from first home buyers in 2021-22 solvency is solid. There could be an NPL cycle in FHBs and investors, but perhaps only 2-3% of housing loans woild become impaired and that would take several years to materialise, so it may be a shock to earnings, shaving them by several billion a year, but Aussie bank shareholders are likely to barely notice.

      What it will do is slam the NZ economy though. Expect more young kiwis washing up on the East Coast of Oz looking for work.

      • Agree with the general comments but would challenge the “full recourse” narrative. Full recourse only works if a small % of the loan book is sailing in distress. If you get broad based stresses across the economy and the indebted banks will be held back by regulators and politicians on implementing full recourse on a larger issue.

        What is clear between AU and NZ is that if the ship is going down you want everyone to be onboard the same ship and bailing out the leaks with the same vigor as their neighbours. If you are one of a few with a problem, banks will use every capability they have to make themselves whole at your expense.

  3. Hugh PavletichMEMBER

    New Zealand housing: Auctions collapse …

    More properties being passed in at the Canterbury auctions, suggesting the cooling market is now nationwide … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/115507/more-properties-being-passed-canterbury-auctions-suggesting-cooling-market-now

    … With New Zealand housing now 9x annua; household incomes …

    Median Multiples | interest.co.nz

    https://www.interest.co.nz/property/house-price-income-multiples

    … and Australia about 7x …

    … Are aspirational and desperate Kiwis already fleeing to more affordable Australia ? …

    … Consider Queensland … particularly regional Queensland …

    Sun stlii shining on Queensland property market … Real Estate Institute of Queensland (REIQ)

    https://www.reiq.com/articles/sun-still-shining-on-queensland-property-market/

    REIQ … Media Releases

    https://www.reiq.com/media-releases/

  4. Hugh PavletichMEMBER

    UPDATE … New Zealand housing: Auctions collapse …

    Weak sales and prices prove housing market slowdown is here … Miriam Bell … Stuff New Zealand

    https://www.stuff.co.nz/life-style/homed/real-estate/128461085/weak-sales-and-prices-prove-housing-market-slowdown-is-here

    CoreLogic says the key drivers for housing market slowdown are “fundamental and longer-lasting” … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/115515/corelogic-says-key-drivers-housing-market-slowdown-are-fundamental-and-longer

    “Mortgage earthquake” erupts under New Zealand’s housing market … Leith van Onselen … MacroBusiness Australia

    https://www.macrobusiness.com.au/2022/04/mortgage-earthquake-erupts-under-new-zealands-housing-market/

    Chief Human Rights Commissioner Says Cold, Crowded Homes Continue To Blight Our Communities … Scoop News NZ

    https://www.scoop.co.nz/stories/AK2204/S00502/chief-human-rights-commissioner-says-cold-crowded-homes-continue-to-blight-our-communities.htm

  5. Jacinda placed herself between a rock and a hard place and she’s going to get cancelled.
    The rock are people struggling to afford rent as they are priced out of the market as the bubble was allowed to inflate.
    The hard place are people struggling to meet mortgage repayment as rates rise and equity turns negative while lending is restricted.
    You could not play this any worse and might go down as yet another textbook example of how to successfully blow up your housing market. It’s a though Ireland or Iceland never happened.