Mortgage holders on average could be paying "roughly 22%" of their disposable income to service the interest payments on their mortgages by the end of this year according to the Reserve Bank.
As recently as December 2021, interest payments for mortgage holders were taking up only around 9% of disposable income.
On Wednesday the RBNZ increased the Official Cash Rate to 4.75% from 4.25%. In its report on the meeting of the RBNZ's Monetary Policy Committee ahead of the rate rise, the RBNZ said the committee discussed the resilience of household balance sheets in the context of rising interest rates and the outlook for reduced labour demand.
"This was seen as a downside risk – with the potential for monetary policy to have larger effects on the economy in an environment of elevated debt levels. However, it was noted that while measures of financial stress have increased marginally, they remain low. The committee agreed that as debt servicing costs rise, spending decisions for many households will become increasingly constrained. These constraints would be felt most by recent home buyers with a high debt servicing commitment relative to their income."
In the RBNZ's latest Monetary Policy Statement (page 16) that was released on Wednesday, the RBNZ commented that Many mortgage borrowers are re-pricing to new interest rates that are higher than the ‘stress’ test rates used by banks in recent years to assess loan affordability.
"To date, the share of mortgages for which scheduled payments have fallen behind remains very low, likely reflecting that household incomes have also increased during this time. However, this share is expected to increase as the economy contracts and employment declines from very high levels."
Appearing before Parliament's Finance & Expenditure Committee on Thursday after Wednesday's latest OCR hike, RBNZ officials were asked about the stress on homeowners with mortgages.
RBNZ Assistant Governor Karen Silk said it was not easy to quantify numbers of households that might be specifically impacted, but she provided information based on the total mortgage stock outstanding and current interest rates.
"The average mortgage rate on stock today is roughly 4.5%," she said.
"Fifty percent of loans, is our understanding, will be repriced over the next 12 months.
"Our estimate therefore of current mortgage rates is that would take the average rate to around 6.5%.
Silk said the RBNZ estimated that at a 6.5% average rate the percentage of disposable income being spent on mortgage interest costs "would move to roughly 22% - on average - by the end of this year".
This last comment produced some audible "oohs" from MPs.
RBNZ Governor Adrian Orr said the central bank's focus had been on making sure that very high loan to valuation ratios have been constrained - "and they have been - so the total balance sheet is looking good".
"But without doubt people who took out highly leveraged loans in the 2020-21 period will be facing very high interest servicing costs.
"These were stress tested by the banks at the types of interest rates that they are doing now so whilst it will be harder to pay they have been stress tested with the ability to pay - but it will mean compromise," he said.
On Wednesday Orr had called on banks to increase their deposit rates by as much as they have lifted their mortgage rates.
National MP Simon Watts asked the RBNZ officials on Thursday about the widening of the margin between what banks charge for mortgages and what they offer for deposits, and overall levels of bank profits.
Silk said the widening of that gap between deposit and mortgage rates "has been more extreme over recent times" and well beyond the historic average.
"So, yes, that is something that we are definitely noting and engaging with the banks on.
"If you think about what we are actually trying to achieve here, we need to see an increase in the term deposit rates as well. That will improve saving and will also help to dampen inflation.
"So, what we are noting is the lag that has occurred there - and our expectation is it should have been increasing at a similar pace," Silk said.
Orr observed that the margin gap was “always one of those difficult things".
"We can explain it, we can rationalise it. It doesn’t mean we are comfortable with it.
"Banks will say that is not our total profitability because it’s just the margin and there’s all the costs and so on and so forth.
"But we want to see deposit rates move along with these mortgage lending rates."
Expanding further, Orr said the RBNZ wants a sound an competitive financial system.
"...And if profits are becoming beyond what you would expect or the risk that they are taking on, then you have issues around are they being sufficiently competitive?
"Are those margins being competed away as they are chasing customers and servicing customers?"
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Rental prices at all-time high, up 4% from a year ago
https://www.1news.co.nz/2023/02/21/rental-prices-at-all-time-high-up-4-…
But NZ is further along on the interest rate wises than Oz. So why is it occurring far more over there than here? Do they have more people renting and less supply than NZ. Or more investors. They are actually saying that the rising interest rates are causing rent rises, but that isn't the narrative in NZ. These people who borrowed to buy a rental would be facing far higher servicing costs as it rises. Many seem to have been relying on capital gains to make their money.
Landlords will not be able to pass on the full increase in mortgage costs to tenants in many cases. I am having to up my rentals but it is only a fraction (roughly 33%) of the hammering I am taking. Numbers will differ depending on level of landlord's debt and how close to full market rent was already been charged. I had wiggle room as I didn't charge full price (I know, I'm soft for a devil slumlord) but the wiggle room will have to shrink a bit now rates are rising and there is also decreasing deductibility of mortgage costs (75% to 50% from 1 April).
I believe what you said is correct.
that's the thing about rental market, there are people who kept blaming landlords being greedy and evil, but truth is, landlord shoulders risks or market changes, extra expenses and provide stability to renters.
in many cases, even if the rent looks absurdly high, it's much cheaper to rent than buying.
It’s starting to happen already (albeit at a slow pace). Fully expect yields to soften from 4-5% to 6-7%. That’s a drop of up to 50% from the peak.
Interesting thing is that even if you are buying at 6-7% funding is at almost 8% so you are still counting on rental uplift.
Yes. But is that the same in Australia where they are increasing rents a lot due to the rising interest rates? Many of those loans too will be old and many will be paid off. In NZ we seem to only expect the rent to cover all the costs, rather than to be a source of income. The money instead is expected to be made on the capital gain, which IMO is wrong to expect this.
22% only.. Cheap az chips.
So houses are really cheap and affordable in NZ as per our all smart, all intelligent and all powerful sitting in a high castle RBNZ.
May be all the bureaucracy needs a walk on the real street of NZ and not just driving in limousines in and out of parliament and government houses and lunch/dinners in flash water front restaurants of Wellington.
Seems so,
So, someone earning 100K can expect to be spending around 1300 per month at the end of the year, and someone earning 200k can expect to be paying around 2600 per month, which seems like nothing.
I have been paying 35-40% of disposable income against my mortgage since the beginning of Covid, and it does not seem that difficult at all.
Now 7 years paid in advance....
The figure of 22% must be wrong, to me that would seem like a mortgage holiday. The 22% must be the interest-only component of disposable income.
The reading is all worng. No wonder the RBNZ keeps increasing the OCR to raise that percentage from 22%. The payment for the mortgage should take into account the total and not just the interest. If RBNZ realises that the total percentage may be around 50% then they may not be that enthusiastic to raise the rates and engineer a recession.
So landlords will put up rent to accommodate higher costs then?
Sounds good. But when tenants stop paying - at all - what will landlords do? I guess, head off to the Tenancy Tribunal. And after 6 months wait for a time slot for a resolution hearing; 6 more months for the tenant to follow instructions, and zero income in the meantime then it will be time to retake of the property (I wonder what state it will be in by then after a court case!) and the standard $10 per week to recover the backlog of debt owing back.
If there's a commodity that's worth preserving at the moment it's a tenant that pays the rent - even if that is LOWER than today's levels, as costs rise across the community. All in the name of Inflation reduction, of course.
B-b-b-b-b-but Landlords have a mortgage to pay. Reckless lending to landlords is part of the reason we find ourselves in this pickle. They've dragged the market up on the expectation that tenants will always pay.
Maybe some Landlords will begin to realize they're not as much of a needed social service as they think.
Greed driven risk taking using the bank's money, and not their own. The first thing they'll do is moan that the banks are greedy......uhhh hello? It's called business. When it's the bank's money, they're first in line for a cut.
They could always buy rentals with their own money??? Oh wait...cash poor???
22%? Who on earth pays that little?
When I was flatting in a crappy flat in Mount Vic as a grad, I paid about that much for my room. Any couple renting a place on ordinary income would be paying 40-50% of their income on rent. A mortgage for a place would probably be about the same at current prices.
Break down these statistics, I suspect they are heavily weighted in favour of people who bought homes 15-20 years ago.
22% is an almost meaningless number until you compare it to the 9% it was a year ago. So interest being paid will more than double because interest rates have more than doubled. No surprise there.
What it does tell us is 13% of all the income of all the households with mortgages is going to be transferred to interest instead of discretionary spend. THAT is a lot of extra money bleeding out of the economy.
Still its hard to work out the impact on spend. only 32% of households have a mortgage on their primary residence and a lot of those might be small? so possible it might only be 15-20% of all households who will meaningfully reduce their spend as a result of the changes to rate.
The question then would be was the discretionary spend of those households significant to the economy or were they pretty tight anyway. And then.... will the rest of us with small mortgages whose pay rises are tracking with inflation and still with tons of equity just keep trucking and spending?
I actually think the latter. Its why when i shop or goto restaurants or talk to customers. everyone is as busy as last year (i get that a fraction of people are struggling i just dont think its enough to impact on the spend of the rest.. they let us have too much cash before... much higher OCR needed)
Exactly, look at who is buying EV at the 60-80K range, 4% are on finance, vast majority are cash transactions. An older cohort are cash up and it a makes no difference interest rates and that is separate to the group you are referring to.
The group you are referring to are getting wages increase above or near inflation, that is a small group in itself, many are not. Then there is the group getting pay equity. Often resulting in substantial wage increases....
Well that'll learn ya.
I have no sympathy for stupidity!
Weather you buy / build on a flood plain
Weather you buy at the top of a market
Or sell at the bottom!
Weather you choose to be uneducated and poor ..
But what pisses me off is the government pandering to thousands of losers by allowing them to leave home, sleep in thier cars until they are given a free motel, then they get a free house, and all this while on the dole!...
And they are just lining up and taking advantage of the " be kind" system and the " Maori wonderfulness," cult that Bob Jones talks ABOUT!
People need to learn to say NO!
I see many of them as casualties of an economic model
and a debt based society where we except half the population live pay check to pay check, use cards and credit to live
where many don’t know how many hours they are working this week so what they are getting paid next week is an anxiety
where many don’t having any savings so can’t pay a bond on a flat, fix a car to get to work, have good peers around them
our society has no financial resilience anymore and I think you see it in our mental health and family violence stats
Why did you making better choices? Start from the beginning and consider your inherited genes and intellect, quality of your parents and any number of lucky events and conditions upon which you were born into.
Luck plays the major role in life, but most of us like to think we have ourselves to thank.
Not significantly no. Outside of severe starvation and malnutrition causing lifelong disability (e.g. malformed limbs) most of the significant difference is before each infant is born. With the genetics, decade of birth, economic condition of parents & their access to healthcare. If you are born with significant genetic disease or high chance of one later in life then the likely outcome is you will be denied an equitable education and denied equal access to the community even if you had one of the highest IQs (in fact your capability and qualifications will be almost meaningless with the discrimination towards you in job applications).
If your parents were of a later generation they had less access to government support such as free tertiary education, government housing ownership support, are more likely to rent in unstable housing environments, less access to supportive healthcare (as now there are exceedingly small limits in hospital support, access to medical support during early years and far less affordability). Right now the best choice for most parents in the similar predicament can make is to move overseas asap even before they have kids. However many disabilities can be severe genetic conditions which are de novo with no family history, or even be birth disabilities from poor birth practices (often the push to deny women cesareans out of ideological reasons against international standard medical advice). So it can affect any new family birth in NZ so better to not have children here at all but just retire here. Even America is 30 decades ahead of NZ in equal rights to access the community and have much better housing affordability across the nation. Even the insurance companies in America do not deny access to children with disabilities or families with prior conditions so they have a much better chance for more equitable access to health care than in NZ (where food prep, mobility transport to GPs and ambulance services are unfunded) and the Royal Commission for Abuse finds the NZ State Depts by and large still physically abuses & neglects disabled children to this day.
Another clueless moron who thinks the dole exists and thinks that those who cannot get employment choose that. Already proving it is luck that is more a factor to wealth and not intelligence or overall economic capability. Protip No one chooses to be severely disabled and denied access to their community, denied housing access (of which only 2% of houses in NZ are accessible) and denied equitable education. Also here is a clue over half of our "jobseekers" have severe disabilities, over half of children in poverty live in a family with disability, over half of disabled adult youth do not have access to employment and work training. NO ONE CHOOSES THIS. NO ONE CHOOSES DISABILITY. NO ONE CHOOSES TO BE DENIED ACCESSIBLE HOUSING, DENIED EDUCATION & EMPLOYMENT
Dont buy yet. A probable long term impact of the way rbnz is managing the downward economic cycle will be a significant further drop in house prices and many more ocr/mortgage rate rises. Inflation is nowhere near sorted.
When the cycle is at an end (the bottom). If you are still in the lucky employed position to buy ... do so then. Normally the downward cycle will last quite a few years to match the upward one (its all like a wave... uuup dooownn uuup dooown etc). My reckoning a 5 to 10 year down cycle in nz and possibly globally.
But heck maybe not.. maybe rates will drop and prices will rise and momey printing will recommence in Q2... lol...
New Zealand's Effective mortgage rate is currently 3.7% and will rise to 5.3% by the end of the year. 640,000 households are servicing a mortgage on the house they live in. New Zealand now has has 337 Billion of total mortgage debt.1.6% additional mortgage interest will consume 5.4 billion per year. Average only tells half the story. It is the 160,000 upper quartile(of debt) owner occupied mortgage paying households that will take the pain for the next 2 years. But the negative wealth effect will be felt by the whole economy. A record $10.5 billion of new mortgage commitments were advanced in March 2021. How many of those borrowers would have felt comfortable then taking the 1 year fixed deal of 2.25%. When interest rate rises were not even a twinkle in Adrian's eye. They are now staring down a refix next month at 6.5%. Every 100k borrowed will be costing additional $77 per week in interest. 800k Auckland mortgage will be $600 a week of additional after tax income to service. The equity you thought you had is well and truly gone if you were a FHB in 2021.
The great Thom Yorke said it best
While you make pretty speeches
I'm being cut to shreds
You feed me to the lions
A delicate balance
Yeah, your right, the average doesn't tell the whole story. Which is good for Mr Orr, because if he had to tell the whole story including the people that got 1 million dollar mortgages on over priced houses in November 2021, and those high prices were partially his responsibility due to QE, then the vibe of the proceedings may have been different.
The RBNZ is almost disingenuous quoting average serviceability metrics to the politicians, since as many commentators note, a lot of mortgages are well seasoned and manageable. What they need to disclose is the trend in the percentage of borrowers where serviceability burdens are greater than 40% of take home pay (typically the metric used to denote stress).
To be fair, I get the idea overcooking QE after covid was a global issue meaning it happened in most first world (for lack of better description) countries? Which will be little consolation to everyone in NZ who got toasted, of course..
It would have helped if our housing market weren't one of the most horribly inflated ones in the world, though.
RBNZ are well versed to attend the select committee today. They've been practising for weeks. They have all the theory at their fingertips & the same crowd haven't spotted a reality in 3 years. The whole drama has been overcooked right from the start of the lockdowns. These are the very folk who helped create today's nightmare.
Now we've got a real crisis on our hands we'll have to add further debt for tomorrow's taxpayers to service. This, after ballooning it out already with their take on an over-hyped bad flu season(s). Give me strength.
If the whole point of the OCR increase is to kerb spending by the population, rather than increasing those rates which then flow on to the bank, why dont they just have a separate kind of "Tax" that everyone must pay into. During times of high inflation the "Tax" rate could be increased, just like an increasing mortgage rate. However, that money can then be used to fund government projects like roading and infrastructure, benefiting the population.
Would this work?
Because they lowered OCR to silly levels which just pushed house prices to a unaffordable levels for average wage couples to buy from scratch. OCR is still under inflation which is a tax as it is, the whole system is out of whack people were paying a million for 3 bedroom old house in a rundown area of Auckland this only happened because RBNZ and other central bank around the world dropped rates levels so everyone got high on debt now the piper has to be paid. At 5% OCR is still low historically
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