New Zealand home owners descend into mortgage hell

New Zealand fixed and floating mortgage rates are on the rise, following three consecutive rate hikes from the Reserve Bank of New Zealand (RBNZ):

New Zealand mortgage rates

New Zealand mortgage rates are rising.

As shown above, floating mortgage rates have risen around 0.7% from their June 2021 low, whereas the 3-year fixed mortgage rate has surged by around 2.2%.

Earlier forecasts tipped New Zealand mortgage rates would peak at about 5%. However, economists are now tipping steeper rises to around 6.25%:

Infometrics chief forecaster Gareth Kiernan said [earlier forecasts] would have been based on a prediction of an official cash rate peak of 2 per cent to 2.5 per cent by 2023.

“But with expectations that it could now get up to 3 per cent to 3.5 per cent next year, the predicted trajectory is affecting the longer-term rates. We’ve also seen a lift of about 50 basis points in ten-year bond rates over the last month…

NZIER principal economist Christina Leung said she predicted floating rates would be about 6.25 per cent in five years’ time, with an OCR of 3.5 per cent”.

New Zealand’s official cash rate (OCR) is currently sitting at 1.0%. And the latest futures market’s forecast has the RBNZ hiking the OCR by another 2.75% by the end of 2023:

Market interest rate forecasts

The futures market tips big rate hikes.

If the futures market is correct and interest rates do rise another 2.75%, then it could have a devastating impact on Kiwi mortgage holders.

To illustrate, consider the below table comparing current monthly mortgage repayments across New Zealand against a 2.75% increase in mortgage rates, assuming increases in the OCR are fully passed on to mortgage holders:

New Zealand median monthly mortgage repayments

Monthly mortgage repayments would surge.

If the market’s interest rate forecast is correct, then the average mortgage holder in New Zealand is facing a 34% increase in mortgage repayments.

This would see monthly repayments on the median priced New Zealand home surge by $1,260, with repayments in Auckland soaring by $1,694 per month.

Given that one-third of mortgages taken out in 2021 were originated with a debt-to-income ratio above six, a huge number of Kiwis would likely fall into acute mortgage stress:

New Zealand mortgage debt-to-income ratios

Kiwi mortgage holders are highly leveraged.

New Zealanders better hope the futures market is wrong about interest rates. Otherwise Kiwi mortgage holders will be cruising for a bruising.

Such a large increase in mortgage rates would also likely cause a sharp fall in house prices, which could push many recent Kiwi buyers into negative equity.

Unconventional Economist
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Comments

  1. I suspect Jacinda is following through on her promises from 2017. If she does something useful on immigration, like ending international student work rights, NZ will be looking like a good place to call home. If she’s going to do it, she’ll have to do it soon because there’s no way she’ll win another election.

  2. It’s a total shit show. Banks and the RBNZ keep rabbiting on about the average mortgage holder but you are spot on, Econ 101 tells us all the action happens at the margin and in housing thats investors and FHB.

    The core problem for many first home buyers, notably those in Auckland, is that the Banks have only limited capacity to offer high LVR loans, so they’ve been ‘doing the young a favour’ targeting them at FHB, and these people also have very high DTI, some now 7x, AND – it gets worse – many of these buyers are on interest only loans. So yes, they have met the stress test of 6% in the banks calculator, but prior to the review of the CCCFA its unclear if those numbers can be trusted. So if they get distressed, they are going to face serviceability AND solvency issues, AND the bank won’t be able to restructure their loans, they will go into watchlist, then become non performing.

    It’s increasingly hard to see how the NZ housing market doesn’t crash.

  3. – I am NOT convinced that those higher rates will create a “mortgage hell” right away.
    – For existing mortgage holders, with a fixed rate, the pain of higher rates will only be felt in say mid 2023 when those higher rates are goign to kick in. And this assumes that those fixed rates will stay at the same level as of today or will go higher.
    – I noticed something else. I assume that people saw that rates fell and then decided to take out a larger mortgage with a higher debt-to-income ratio of over 6x.
    – I consider a debt-to-income ratio (leading to a house price-to-income ratio) of 4 and higher already as “too high” / “overpriced”.
    – Tauronga (Bay of Plenty) has a (median) house price to income ratio of 8. Ouch ………………..
    – Pass me the popcorn……………………….

    • You may well be right.
      But you forget that the house prices are the KPI of all 3 levels of government and, even more so, the RBA.
      The punters will NOT tolerate any negative sideways movement. The heads may roll…

    • Yes, Tauranga (population approx 125,000) has a high L/V ratio. But let’s recall that Tauranga is the retirement capital of New Zealand. Many, if not most, rely on the National Superannuation Payment for their income, and that is set at two-thirds; 66%, of average wages.
      So whilst there’s much merit in what you say, the stress won’t be as bad as it appears in Tauranga as a lot of retired people already own their own home/retirement unit.

  4. As inflation pushes up the cost of living indebted households will be in a pincer between inflation and interest rates.
    The only thing that will save the indebted classes is rising wages but my bet is, that even though these will rise it will be less than the rate of inflation leaving joe average much worse off.