Walls close in on New Zealand first home buyers

ASB economists are tipping that New Zealand mortgage rates will “peak higher and earlier” than previously thought as the Reserve Bank of New Zealand (RBNZ) hikes the Official Cash Rate (OCR) to counter rising inflation.

ASB now forecasts the RBNZ will follow-up with 50 basis-point OCR hikes in May (to 2.0%), followed by a sequence of 25bp hikes to a 3.25% OCR peak in early 2023. This, in turn, will lift mortgage rates “to around 5-6% over the longer term”:

The RBNZ are clearly worried about the near-term inflation outlook and the risk that inflation expectations stray from the inflation target. The policy assessment acknowledged that the RBNZ has revised up their inflation outlook, with annual consumer price inflation expected to peak “around 7% in the first half of 2022”…

The RBNZ face a tricky balancing act. Either they tighten too aggressively and create a “sharper than needed slowdown in economic activity” or they do not act quick enough and face the longer run costs of entrenched high inflation and inflation expectations…

3.25% is considerably above the neutral OCR of 2% that is consistent with the economy sustaining steady momentum…

[This] means mortgage rates will peak higher and earlier (2022/2023) than our previous forecasts, before easing to around 5-6% over the longer term.

If ASB’s 3.25% OCR forecasts come to fruition and are passed onto New Zealand mortgage holders, then the average floating mortgage rate would rise to 7.33%.

The next table summarises the impact of the ASB’s forecast by comparing monthly mortgage repayments on the median priced New Zealand home at the end of March 2022 (when the OCR was 1.0%) with the projected increase outlined by ASB (to 3.25%) assuming steady home values:

New Zealand median mortgage repayments

ASB’s interest rate forecasts would see the monthly mortgage repayment on the median priced New Zealand home rise by $1,033 (27%).

Mortgage repayments would climb even further in Auckland (by $1,389 a month) and Wellington (by $1,159 a month) due to their higher median dwelling values.

Not surprisingly then, there are fears up to half of New Zealand first home buyers could suffer financial distress if mortgage rates rise above 6%, let alone above 7% as forecast above:

The [RBNZ’s] own research, released to the Herald under the Official Information Act, reckons as many as half (49 per cent) of the people who bought their first home last year during the market peak could face “serviceability stress” if interest rates hit 6 per cent.

This would hammer the tens of thousands of buyers who took on debt at historically low interest rates who will now find themselves re-fixing their mortgages at much higher rates…

A Reserve Bank paper from September last year warned these people could face “serviceability stress”…

[First home buyer] Liam said he was “a bit worried” about borrowing costs increasing when his fixed term ends next year.

He estimates his annual borrowing costs could jump by an additional $25,000 once he comes off his fixed term…

[Mortgage broker] Bruce Patten said that wherever rates landed there would be pain.

“There will be people who have to sell and sell down.”

Recent leveraged first home buyers are about to get a harsh dose of interest rate reality.

If the RBNZ lifts rates as aggressively and ASB is predicting, then highly geared mortgage holders are cruising for a bruising.

New Zealand house prices would likely experience sharp falls and many recent buyers will likely be thrown into negative equity.

Unconventional Economist

Comments

  1. Sorry to ask dumb question, but here goes. Are banks going to raise HL rates, to maintain a profit, due to inflation, (they are effectively loaning money for free if inflation is 8% and HL rate is 4%) or are they forced to by the RBNZ to raise rates?
    The original loan was made out of conjured up credit and securitised against the Property that formed the loan, so if the banks jack up the rate of the loan, and people can’t pay and house prices fall, then that seems worse for the bank than just doing nothing/not much and seeing if inflation comes down.

  2. $12,000 or so per annum coming out of family accounts than the year prior. This has to massively affect spending in the general economy going forward. And what effect covid stimulus bringing forward consumption? I.e. people purchased a lot of tech and new furniture during lockdowns, and undertook a lot of home renovation activities. Once you added that room, installed that solar panel, replaced your vehicle (etc) it is a while before you need to make a similar purchase again.. tough times for retail ahead. Staff asking for massive pay rises, costs through the roof, and customers closing their wallets…

  3. Hugh PavletichMEMBER

    Developers cutting asking prices as housing market slows … Emma Hatton … Radio New Zealand / Stuff New Zealand

    https://www.stuff.co.nz/national/300569518/developers-cutting-asking-prices-as-housing-market-slows

    Property developers are cutting their asking prices by tens of thousands of dollars as they try to entice buyers amid a slowing market.

    They are struggling to get construction supplies on time, secure finance and convince buyers to purchase off the plan.

    Lawyer Joanna Pidgeon from Pidgeon Judd said the market was getting tougher for developers.

    “We are seeing some smaller developers on-sell. They may have bought at a premium but they’re looking to because they can’t get their pre-sales. … read more via hyperlink above …
    .
    .
    … New Zealand has the highest new residential consent / approval rate in the developed world at 9.7 units per 1000 population per annum (check Stats NZ excel file Tables 8 & 9 below). In contrast Australia is about 8.5 (220,000 units last 12 months / 25.8 million population clock) and United States 5.7 (1.9 million units / 332,622,000 population clock). …

    … New Zealand’s housing is the least affordable in the developed world too at about 9.0 times annual household incomes (median multiples) … Australia about 7.0 … the USA about 4.0 times. …

    … New Zealand’s new housing costs are way higher, because it still has the high cost / low productivity horse and buggy cottage industry structure … and has failed to restore a more efficient production industry (e.g. DR Horton USA; Metricon Australia… remember New Zealand’s earlier Group Builders ?) because of inadequate supplies of affordable / near rural priced greenfield land and failed drafting and implementation (unnecessarily complex) of the 2020 Infrastructure Funding & Financing Act to properly bond debt finance infrastructure (learning from the about $US 4.2 trillion United States Municipal Bond Market / Municipal Utility District structures) …

    … As decline sets in to New Zealand residential building sector, the local building tradesmen will be keenly sought after by the Australian construction industry, to build more affordable houses there for Australians and migrating young Kiwis ! …

    Building consents issued: February 2022 | Stats NZ

    https://www.stats.govt.nz/information-releases/building-consents-issued-february-2022

    … The Infrastructure Funding and Financing Act 2020 (the Act) established a new funding and financing model to enable private capital to support the provision of new infrastructure for housing and urban development. …

    Infrastructure Funding and Financing Act 2020 – New Zealand Ministry of Housing & Urban Development

    https://www.hud.govt.nz/urban-development/infrastructure-funding-and-financing-act-2020/

    https://www.google.com/search?q=infrastructure+funding+and+financing+act+2020&gs_ivs=1#tts=0

    • Hugh PavletichMEMBER

      New Zealand: Self – inflicted general and housing inflation woes … driving the young overseas to avoid politically created and unnecessary mortgage slavery and poverty …

      … In normal affordable markets housing does not exceed 3.0 times annual household income with sensible and responsible mortgage loads about 2.5 times annual household incomes…

      … Google search All Editions … Demographia International Housing Affordability Surveys and 2021 Edition … Demographia United States 188 Markets Housing Affordability Survey …

      High government spending fuelling inflation rate – (Opposition National Party Leader Christopher) Luxon … Radio New Zealand

      https://www.rnz.co.nz/news/political/465554/high-government-spending-fuelling-inflation-rate-luxon

      National Party leader Christopher Luxon says the government is addicted to spending and is making inflation worse.

      Another high quarterly inflation figure – expected to be near the 7 percent mark – is to be released tomorrow.

      Luxon said the government has been blaming international factors for adversely affecting inflation but Singapore is at 2 percent, Australia is at 3.5 and Japan is at 1 percent while dealing with the same challenges.

      With New Zealand at 6 percent heading to 7, the government needs to be focused on reviewing spending, he told Morning Report. …

      … Asked if National would cut a $6 billion allowance the government is poised to spend, Luxon said the government has increased spending by 68 percent since it came to power. … listen and read more via hyperlink above …

      BNZ joins ANZ pushing fixed home loan rates higher as the relentless rise in wholesale rates compresses bank margins faster than some of them are responding. Overnight wholesale rises is keeping the pressure on … David Chaston … Interest Co NZ

      https://www.interest.co.nz/personal-finance/115361/bnz-joins-anz-pushing-fixed-home-loan-rates-higher-relentless-rise

      … Not surprisingly …young Kiwis flee from million dollar housing mortgage debt risks …

      Brain drain: Kiwis heading overseas as living costs rise … TVNZ

      https://www.1news.co.nz/2022/04/18/brain-drain-kiwis-heading-overseas-as-living-costs-rise/

      … access related post …

      https://www.macrobusiness.com.au/2022/04/macro-morning-1285/#comment-4264481

  4. Hugh PavletichMEMBER

    FURTHER UPDATE … UPDATE …New Zealand: Self – inflicted general and housing inflation woes …

    … an essential read …

    World watching NZ housing market as Auckland labelled ‘canary in coal mine’ … Geraden Cann … Stuff New Zealand

    https://www.stuff.co.nz/business/128396590/world-watching-nz-housing-market-as-auckland-labelled-canary-in-coal-mine

    International investors are increasingly watching New Zealand’s housing market for signs of trouble and as an indicator of things to come, with one Australian financial services firm labelling Auckland the “canary in the coal mine”.

    High mortgage debts compared to incomes, house price rises that outpaced every other country studied, and the Reserve Bank’s aggressive steps to fight inflation have resulted in New Zealand’s housing market being the one to watch, according to multiple analysts both domestically and across the Tasman.

    Auckland’s unfortunate label came from Barrenjoey, an Australian firm providing insights to banks and investors.

    The firm’s research focused on debt to income ratios (DTIs), and found almost two-fifths of recent Kiwi home loans were lent out at ratios considered high-risk and curtailed by other countries, including the UK and Ireland.

    DTI ratios are calculated by dividing the total debt of a borrower by their gross income, and are a measure of how leveraged a customer is, and therefore how at-risk they are if the cost of servicing their mortgage rises. … read more via hyperlink above …

    Mortgage Measures | Central Bank of Ireland

    https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/mortgage-measures

    Demographia International Housing Affordability: All Editions

    http://www.demographia.com/db-dhi-index.htm

    … When Ireland’s housing bubble burst in 2007, the median multiples / house price to income ratios of its metros (refer Demographia Surveys above) went from 4.7 to 2.8 … putting all its Banks to the wall and requiring about 70 billion euros of bailouts from German financial institutions, that stood to lose the most….

    … New Zealand’s housing across the board is now around 9.0 median multiple / house price to income according to Interest Co NZ …

    Median Multiples | interest.co.nz

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

  5. kiwikarynMEMBER

    Can you add a column to your chart, which is the total annual increase in mortgage payments? Then I can send it to friends to freak them out LOL. I don’t think the average Aucklander has a spare $16k lying around doing nothing.