Fixed rate mortgage reset will hammer New Zealand housing

As we know, the Reserve Bank of New Zealand’s (RBNZ) has aggressively hiked the official cash rate (OCR) from 0.25% in August 2021 to 2.0% currently.

New Zealand’s housing market is already tanking, with median dwelling values nationally plunging 9.2% from the November 2021 peak and the stock of unsold homes ballooning.

The RBNZ has also flagged that the OCR will hit 3.4% by December before peaking at 3.9% in June 2023. This would mean that the RBNZ is only around half way through the rate hike cycle.

Citi bank analyst Brendan Sproules believes New Zealand’s housing market is so far coping better than expected, but will come under increasing pressure once swathes of fixed rate mortgages expire later this year:

With new mortgage rates already spiking to more than five per cent in New Zealand, Mr Sproules said the canary, or NZ households, was “more resilient than expected”.

“Mortgage activity and house price growth have decelerated rather than fallen sharply,” he said.

“Also, for most borrowers, who still enjoy an average mortgage rate of just 3.14 per cent, rate hikes are yet to dent the household budget.

“But the next six months are crucial, when most of the current fixed-rate mortgages are due for a rate-reset”…

Mr Sproules said the NZ mortgage market was primarily a fixed-rate market, which had some serious implications for the effectiveness of monetary policy.

For most borrowers, the impact of eight equivalent rate hikes of 25 basis points each since the end of 2021 had mostly not yet been felt on the household budget.

These are pertinent points by Brendan Sproules. Unlike Australia where floating rate mortgages dominate, the bulk of Kiwis are on fixed rate mortgages of two years or less. This means that Kiwis that originated mortgages at rock-bottom pandemic rates have yet to impacted by the RBNZ’s aggressive monetary tightening.

This situation will obviously change towards the end of this year when these fixed rate mortgage terms start to expire and Kiwi borrowers are forced to refinance to significantly higher (perhaps double) mortgage rates. That is when the impact of the RBNZ’s tightening will truly be felt.

Household consumption will tank and the New Zealand economy could easily be thrown into a sharp recession. House prices will also very likely experience peak-to-trough losses of more than 20%.

How deep the downturn goes will depend on how aggressively the RBNZ hikes rates.

Unconventional Economist

Comments

  1. Hugh PavletichMEMBER

    Westpac McDermott Miller Confidence survey at lowest level ever as pessimism bites in NZ … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/personal-finance/116436/westpac-mcdermott-miller-confidence-survey-lowest-level-ever-pessimism

    The cost of living crisis is biting – and boy are we getting grumpy about it.

    Consumer confidence in New Zealand has plummeted.

    The latest Westpac McDermott Miller Consumer Confidence Survey has just recorded the lowest reading on NZ consumer confidence since the survey began in 1988, which given that the survey period has included the gloom and doom that enveloped NZ after the 1987 stock market crash, and the Global Financial Crisis of 2008, is pretty remarkable.

    The post-stock market crash period and post GFC periods are the only two times in fact when confidence levels have been close to as bad as they are now.

    The survey’s consumer confidence index dropped sharply in the June quarter, falling 13 points to a level of 78.7, its lowest level ever. … read more via hyperlink above …

  2. The Travelling PhantomMEMBER

    New Zealand thread becoming my favourite,
    Kiwi commentators are great

    • It’s appropriate. The Kiwis are always saying weeee, so off the cliff we go.
      ….Weeeeeee …eee……ee…e

    • kiwikarynMEMBER

      They are. 16k left the country in April, 6k in May, and 12k left in the last 20 days.

  3. Hugh PavletichMEMBER

    MB readers need to read ‘Peters’ comments on the thread below … and also last Fridays MB article thread ‘ New Zealand’s housing market suffers biggest fall on record’ …

    Reserve Bank sounds death knell for New Zealand’s housing market … Leith van Onselen … Macrobusiness Australia

    … starting with …

    https://www.macrobusiness.com.au/2022/06/reserve-bank-sounds-death-knell-for-new-zealands-housing-market/#comment-4289096

    PeterMEMBERJune 20, 2022 at 4:27 pm

    Did a detailed report for my clients on Friday looking at the income statement and mortgage serviceability of first home buyers in Auckland. At 4.85% they can (just) manage an IO loan, but a P&I loan entails a deficit of about 5k a year. Not insurmountable, but hard to manage without outside capital injection and leaves them precarious. But at 7% it’s game over…. the deficit, even on IO, looks to me unmanageable.

    We are currently crossing the Rubicon…

    And as house prices fall, new high LVR lending solvency is being rapidly eroded with another 7% slide taking the November 2021 vintage into insolvency. If prices tumble 20%, which they could easily do, then nearly all loans back to end 2020 become insolvent. That suggests to me we are almost definitely going to see a rise in delinquencies, an NPL cycle – even if its modest – and pressure bank earnings. I dont foresee a major NPL issue but if you look at house price falls in Spain, Ireland, and many cities in the US, one can’t be ruled out. Either way, consumption is gonna get torched.

  4. The big news today was ANZ Bank hiking mortgage rates sharply across-the-curve with the 1yr fixed rate climbing 50bp, to 5.35% (5.95% for LVR>80%) while the Westpac confidence indicator collapsed.

    Updating my budget numbers for a first home buyer with 20% deposit (5.35% interest) buying a lower quartile home in Auckland (loan 720k) and a bare-bones budget, I come up with 54.7% of after-tax (and Kiwisaver) income going to the P&I mortgage and 43.7% going to an IO mortgage. On a P&I mortgage, I come up with a deficit of $8.4k p.a. (assuming median household income for a couple with no children aged 30-34) and a surplus of 1.4k on an IO mortgage. For my expenditures, Ive used data from the IRD inflation adjusted, assumed no expenditure on life or medical insurance, electricity of just $38/week, food of just $285/week and recreational spending of just $89/week. The food bill on a per-meal basis comes to about $7/person – I’ve just checked prices at countdown and that’s about the cost of spag-bol… (spagetti, a sauce and mince) per meal (or barely the cost of a latte at a downtown cafe), the recreation covers (just) two movie tickets, two popcorns, and two McD meals afterwards (basically a student date night!).

    I think today, we crossed the Rubicon.

    • The Travelling PhantomMEMBER

      What a dark image, so it’s definitely now either have a child or buy a house…

    • Peter, yesterday you posted lending data that was clearly inaccurate , any reason or do you have another source other than the tabulated RBNZ data
      “37% of FHB’s had LVR>80% and since Jan-21 this lending translated to NZD 12.37bn” “In 2021, 15.6% of FHB’s had a DTI>6 and LVR>80%.The quantum of this is small, but the vulnerability high.”

      • The figure of NZD 12.37bn comes from the following:
        Higher than 80% LVR borrowers,F2 | First home buyer | no LVRN.MMB2.BC1
        New Residential Mortgage Lending by Borrower type – C31

        The 37% figure is calculated from the same table,
        Higher than 80% LVR lending | B2. First home buyer | LVRN.MMB1.BC1
        divided by
        Total lending | A2. First home buyer | LVRN.MMB1.AC1
        The figures on DTI and LVR quantum comes from the tables C32 and C40.
        The numerator is B12. TDI >6 (excl unknown), LVR> 80% DTINV.MPV.W1BW1

        The denominator is New Commitments First Home Buyers, sum from
        DTINV.MPV.BBW1 DTINV.MPV.CBW1 DTINV.MPV.DBW1 DTINV.MPV.EBW1 DTINV.MPV.W1BW1 DTINV.MPV.UBW1

        All of the data is sourced from the RBNZ. I have double checked my calculations and I don’t see that I have made any errors.

        Several readers have made some nice comments on MB about my work, thank-you. I have no skin in the game in NZ housing having sold-up and left NZ at the end of 2020. But I write about it here because its interesting, its part of my work and I hope people will find it useful.

        • Absolute BeachMEMBER

          Game, set and match Peter. Again, please don’t stop posting. And keen to hear more details when the default rates on any loan products increase measurably. That is the big ‘tell’ as defaults come late in the unwind.

        • I have the same B2 data January 2021 onwards lending to FHB above 80 percent LVR 7.568 billion , total lending FHB 21.907B, B12 data lending LVR above 80 percent and TDTI above 6 amounts to 1.17 billion or 5.35 percent. As an aside
          Housing stock increase ( not households ) / Population growth (Stats NZ ) 5 year periods starting December 1996 thru December 2021, Change in pop 246000 new dwellings 94000, 227000/113000, 222000/127000, 185000/82000 373000/95000, and to December 21 355000/147000. Notwithstanding the recent rise in dwellings, the rate of new dwellings/ population over the last five years remains only within the long term average, unfortunately the period 2011-2016 was not

          Average mortgage for FHB( now homeowner) resetting monthly April 2022 thru April 2023 (assuming a 2 year) between 449000 and 543000,

          I

    • kiwikarynMEMBER

      Most FHB are not buying with >20% deposit, but are coming in under the RBNZ’s 10% allowance for low LVR lending. Most of their deposit is money from the FHB grant, Kiwisaver funds, or the Bank of Mum & Dad, and not from a history of savings from income. Redo your calculation using the higher mortgage interest rates (6.29% 2 year rate) charged for <20% LVR and where do we end up?

      • Exactly. But when I do my analysis, I always try to take the most conservative path, that way, if I come up with something that is striking, the probability of there being something to it is higher and I’ve offset any unconscious biases I might have. Also, it makes it easier to argue as there’s always someone who says “oh but you said xxx and that’s wrong therefore you are wrong”… anyway, the calculations. I have updated the average price of the lower quartile house in Auckland – which is where my concern primarily rests (NZD 880k as of interest.co.nz today), and then followed your assumptions. I’ve used the 18 month rate at 6.19% as of interest.co.nz again. A P&I mortgage is consuming 65.9% of the average first home buyer household’s after-tax and kiwisaver income and 50.5% if its IO. The residual cashflow in the budget falls to NZD -18,283 for P&I and NZD -4,699 for IO.

        And meanwhile, just today, BNZ came out and followed ANZ, and it was reported that stress testing is now being done around the 7.6% level, so housing credit just got a whole lot tougher to obtain.

  5. It’s looking very much like the RBNZ (and all Central Banks?) have lost control of the cost of debt.

    Lenders are going to price their product according to need (demand) and any OCR will be irrelevant.
    OCR 2% when the CPI increase if 7%?
    The OCR has lost its purpose.

    • The Travelling PhantomMEMBER

      Banks were happy to take all that TTF on 0.1% here in Oz and lend it for 2%
      But now they want to take money from RBA for 0.85 % and lend it back for 6% …
      Every one should have direct bank account with the central bank and ditch this middle useless intermediate

      • SuperfluousMEMBER

        Yes, and I find your list of simple steps to begin to extricate us from this mess very commendable with great merit.
        Keep on gouging away…
        That’s two of us now…

  6. BoomToBustMEMBER

    What occurs when they come to refinance, do they run the numbers again and check if they can afford the loan?

  7. kiwikarynMEMBER

    I think the really huge problem is not going to be home owners, but the “Mum & Dad” investors. They are about to suffer the double whammy of losing mortgage interest deductibility at the same time as interest rates go up. These are the people who are going to be sitting on seriously cashflow negative properties and assuming they have their own home mortgages to pay as well, something is going to break and break fast.

    • Totally agree. I have some real horror stories of people buying “investment properties” who are in fact slum landlords, zero investment in their properties which are just depreciating into the ground and they think they’re being smart. Problem is, the data on investors is tricky to use and many investors will have other resources they can draw on. I also think many Mums and Dads who should be fine have seen their homes as ATM’s and they’ve taken on credit elsewhere. We may not have quite the same overhang of non-bank debt as pre-2008, but I think the risk is there. And no one knows how deep the price correction will be… but there’s no reason why we can’t see a serious cycle (30-40% correction in nominal prices and 50% in real). A lot of the ‘supply shortage’ that people waffle on about has corrected post-COVID.

  8. Hugh PavletichMEMBER

    BNZ is the next to move their mortgage rate card up sharply, maintaining a small discount to ANZ for the key 2-year fixed offer. BNZ also raised their term deposit rates … David Chaston … Interest Co NZ

    https://www.interest.co.nz/personal-finance/116437/bnz-next-move-their-mortgage-rate-card-sharply-maintaining-small-discount

    Bank of New Zealand follows ANZ in lifting home loan rates … Rob Stock … Stuff NZ

    https://www.stuff.co.nz/business/129044607/bank-of-new-zealand-follows-anz-in-lifting-home-loan-rates

  9. kiwikarynMEMBER

    So question for the bankers. If you currently have a mortgage on a house at >20% LVR interest rate, and house prices fall 10%, and you now only have 10% equity, do the banks reassess your mortgage rate and make you pay the higher rate for <20% LVR lending?

  10. Hugh PavletichMEMBER

    Global housing bubbles: New Zealand the worst of 30 nations … Bloomberg

    The World’s Bubbliest Housing Markets Are Flashing Warning Signs … Enda Curran … Bloomberg

    https://www.bloomberg.com/news/features/2022-06-21/cooling-real-estate-markets-in-us-uk-risk-deeper-global-economic-slump?srnd=premium-asia

    A world economy already contending with raging inflation, stock-market turmoil and a grueling war is facing yet another threat: the unraveling of a massive housing boom.

    As central banks around the globe rapidly increase interest rates, soaring borrowing costs mean people who were already stretching to buy property are finally reaching their limits. The effects are being seen in countries such as Canada, the US and New Zealand, where once-hot residential real estate markets have suddenly turned cold.

    It’s a sharp reversal from years of surging prices fueled by rock-bottom mortgage rates and government stimulus, along with a pandemic that popularized remote work and sent homebuyers on the hunt for bigger spaces. An analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals.

    New Zealand at Top of Risk Ranking

    Five gauges of property risk for OECD member and accession countries …

    (graph)

    … Housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices, according to Bloomberg Economics. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands also are looking frothy. … read more via hyperlink above …