There was much talk ahead of the Reserve Bank beginning to hike interest rates last year of the amount of 'bang for its buck' the central bank would be able to get.
When economists and commentators made such statements they were referring to the fact that most Kiwi homeowners with a mortgage had 'gone short' with their fixed interest rates at that time, taking advantage of super-low rates (according to RBNZ averages) such as 2.2% for one year and 2.55% for two years as of June.
Presumably most people thought it would last for ever. I can't find any other reason to explain why the punters weren't biting banks' hands off with the offers of five year-fixed at about 3% that were also available. The figures tell us there weren't many takers. Those few who did could be justified in feeling just a little smug and pleased with themselves.
But June 2021 proved to be the low point for interest rates and it's been a climb like the uphill bit of a roller coaster since.
As of time of writing the big banks (I use them as the example because there's quite a bit of variation among all the banks just at the moment) are offering rates in the region of 5.99% for one year and 6.19% for two years. All rates quoted here are 'specials' with loan to value ratios (LVRs) of less than 80%.
Anyway, back to last year. After interest rates began rising in July (this happened ahead of the RBNZ starting to lift the Official Cash Rate in October), much of the commentary was around the fact that about three-quarters of the total mortgage stock for the country was either fixed for a year or less or was on floating rates.
So, in terms of the 'bang for the buck' for the Reserve Bank, it meant that interest rate rises would be quickly felt by mortgage holders and therefore the desired dampening effect on household spending could be achieved pretty readily.
I think it's pretty clear at this stage, however, that things are not slowing anything like as quickly as the RBNZ and others in the marketplace might have expected. It's worth looking at...
Among the month-end suite of data released by the RBNZ this week was the crunchy stuff on how much of the mortgage stock is on fixed versus floating and how long it is till various amounts of fixed mortgage monies need to be re-fixed. The figures were updated to as far as the end of September 2022.
Okay, so going back 12 months in these figures, we can see that as of September 2021, there was a total mortgage stock of $324.433 billion. Of this $30.064 billion was floating, leaving $286.37 billion on fixed.
Right, keeping this as short as possible, at that time, 17.8% of the fixed mortgage book (nearly $51 billion), was due for refixing within just three months, while a third (($94.5 billion) was due in six months or less. Just over two thirds (nearly $194 billion) was up for refixing in 12 months or less. If you added in the floating mortgages, then at that time 71.5% of all the mortgage money was liable to see a change in interest rate in 12 months or less.
To repeat then - 17.8% of fixed mortgage money was due for refixing by the end of 2021, while over two thirds was up for a refix in a year or less.
Twelve months on then and things have certainly not stayed still.
The RBNZ figures show that as of September 2022 the mortgage stock stood at $341.534 billion with $39.282 billion floating and $302.252 fixed.
The 'headline' news here is that now just a little over half ($159 billion) of the fixed mortgages are due to be refixed in 12 months or less. That's down, remember, from over two thirds a year ago.
If we add in the floating mortgages, it means 58% of the total is up for an interest rate change within a year or less. That's down from 71.5% a year ago.
Just focusing on fixed rates again, it means that while the country's total fixed mortgage stock has increased by around $16 billion in the past year, there’s about $35 billion less of mortgage money due to be refixed within 12 months' time than there was a year ago. That's a significant shift.
What all this means is a lot of people have already seen their mortgage payments go up considerably in the course of the past year. And it means a lot fewer people have this jump to face in future.
In terms of what's ahead, there's just under $32.5 billion of fixed mortgages due to be refixed before the end of the year. That's just under 11% of the fixed mortgage total. Still pretty significant.
And looking out to early next year, within the next six months up to the end of March 2023, just under a quarter of the total fixed mortgage money (and, yes, this figure this includes those refixing within three months) is due to be refixed. That's just under $69.5 billion in total.
What sort of hikes have people faced? And what are those up for whose mortgages need refixing as of now?
Here's a couple of abridged examples from the interest.co.nz calculator. The first example is for a 30-year mortgage taken out for two years at the prevailing rate of exactly two years ago and comparing that with today's rate. The $309,000 mortgage amount is used because that was the average sized new mortgage in October 2020, according to RBNZ figures.
In short, with this example the payments would now be $643 more a month - a 51.5% increase on the rate of two years ago. The holder of such a mortgage would be up for more than a quarter of a million dollars MORE in interest costs over the life of the loan than would have been the case two years ago.
The second example is comparing a $369,000 mortgage (average size as of October 2021) taken out for 30 years with one year fixed, and what the payments would be on such a mortgage now.
With this example the mortgage holder would now pay $622 (39%) more a month and would face interest costs across the life of the loan just under a quarter of a million dollars more than with the interest rate of a year ago.
Okay, so, with eye-popping figures like these, why isn't the country falling over?
Well, interest rates WERE historically low till last year. We know that a lot of people got ahead on their payments.
Not everybody climbed in to the super-sized mortgage environment of 2020-21.
Not everybody has a mortgage. A lot of people don't.
Is the RBNZ over-estimating its ability to affect people and their spending patterns with higher interest rates?
The counter argument of course is that people might be suffering quietly. People who got ahead in repayments or saved money during the Covid lockdown periods might be slowly eroding their comfort margins.
And a lot of people, as seen above in this article, are still yet to face the music with higher rates - even though a substantial number already have.
For me, I think the worst case scenario here would be if there are sufficient numbers of people in the community, either who don't have mortgages or are earning lots, who will be impervious to whatever the RBNZ throws out at them.
Why this would be bad is that the more the RBNZ is tempted to push rates higher because it's not apparently getting the traction it wanted, the more there is the risk that those in a precarious position may fall over.
We could see a very uneven situation develop where the haves keep on having and the have-nots suffer.
This needs watching very closely.
The weather's bucking up and getting warmer. Fabulous. People are looking forward to summer. They ARE out spending. Things are looking up.
But, people, things might not be what they seem.
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37 Comments
In 2021, when home loans were still at 2.4%, ANZ tested serviceability at a rate of 5.8%. Now their 1 year special interest rate is higher than that.
New Zealand's own sub-prime mortgage mortgage crisis in the making? I read countless times that borrowers should have known interest rates couldn't stay low forever, but why did the banks need to lower their test rates?
Because overlooking all the other things that have gone wrong or that people have profited from on the way up is our national sport, particularly when you get to wag your finger in a young Kiwi's face about not being as smart as you are or working as hard as you did.
I can't find any other reason to explain why the punters weren't biting banks' hands off with the offers of five year-fixed at about 3% that were also available. The figures tell us there weren't many takers. Those few who did could be justified in feeling just a little smug and pleased with themselves.
Another round of smug over here, thanks, I need to wash away the taste of banker's hand, it's rather bitter.
In case I haven't mentioned it yet (and I'm sure I have) my mortgage broker practically called me an idiot for fixing everything for 5 years in May last year. I guess time will tell.
(I will say that this is me on the roundabouts, I was on the swings during the GFC...)
Those that re-fixed in the last 12 months have done so at much lower rates than currently on offer and so the 15% or so that have been through the evolution have had a soft landing. I was on 2.39% and re-fixed at 5.29% for 18 months a while back. We used the low rates to over pay so our outgoings are unchanged - just the term has changed. I would imagine that many are in our position. I also note the recent article showing a spike in unsecured loans - the canary down the mine?
"Why this would be bad is that the more the RBNZ is tempted to push rates higher because it's not apparently getting the traction it wanted, the more there is the risk that those in a precarious position may fall over. "
Interest Rates Are Going High For A Long Time.
I have wondered the same. Few if any here cite personal impacts. I’m at a stage where I have no mortgage. TD rates are a real boon but am going backwards after tax. Personally we are doing everything to cut back costs. We are also anticipating price increases and bringing spending forward. I don’t think we have ever been in such a comfortable financial position. The more the RBNZ tightens, the better for us.
" TD rates are a real boon but am going backwards after tax"
Tax does have an effect but I'd suggest "going backwards after tax and inflation" with inflation taking a big bite as well. As tax is not going to go away I'm hoping TD rates go to within a % or two higher than inflation within the next two years.
Personally? I've got til mid-2024 until I have to worry about rates again, but will need to move house before then due to live events that simply cannot be put off. So the costings I work on include the next bit of mortgage I don't have yet as well. Insulated enough for now, but hoping that my next house is getting cheaper faster than my current one is.
Could be life on packet noodles and home-made bread for a while but I don't have the time to sit around and wait for something that may take years to unwind. Life just isn't like that and I'm not getting any younger.
The equation is that those who borrowed irresponsibly will suffer, those who didn't won't. As it should be.
Tell that to the employees that will soon lose their jobs when the companies they work for go broke (yep thats those greedy buggers "who borrowed irresponsibly" against their house to fund their business and created new jobs).
Right now its easy to get another job but come back in 12 months when interest rates reach 10% and businesses fold like a house of cards.
For a lot of people, the impacts will be delayed. I took out a 30 year mortgage at the end of 2020, but when I did I ensured I could pay it if interest rates went to 10%, with the aim of paying it off in 15 years. I did a 2/3/4 split, though of course wishing I'd put it all on 5 years, at least the increases won't hit all at once. So what the interest rate raises mean for me are a longer time paying off a mortgage, and correspondingly less money to save for retirement. The people I feel really sorry for are the people I know who bought a house in 2020/2021 because they'd been waiting to get into stable accommodation before starting a family and either did have a kid expecting that they'd have at least a year or two of low rates so they could take maternity leave or discovered that it was too late.
I've never, ever, seen you write an article about how renters are "managing" rent hikes.
Never seen any article about it in any of the newspapers either.
All this handwringing and concern for mortgage holders. Nobody has ever given a toss about the extreme pressure that renters have been under for years now.
We have the highest rent-to-income ratios in the developed world. But all you want to write about is the small section of society with big mortgages.
Blinkered. Biased. Uncaring. Screw the renters, who cares anyway... it's all about the homeowners.
Lets knock down house values by making them cost more to buy....lol Looking at the numbers above its clear that no matter when you bought into the market ...you are paying more...to....the....banks....lol Wait it gets worse because everyone was living like rockstars nobody wants to come back down to meagre profit margins so it all self perpetuates . Clearly values are retreating so why the need to keep hiking? Ive said it before there will come a point where the dam breaks ...be careful what you wish for...Hike too much and it will come like a thief in the night....upon all and sundry...my opinion beyond 4.25% ocr lays a desolate wasteland... 5% should be at least another year or 2 away ,if at all . Doesn't bother me what they do ...but it will to those that stumble and fall. The Ozzies arent rushing to fall into a hole... The Fed will punch again but will feel some real heat this time round.... The big problem is the jump from historical ultra low rates to more standard rates ...
We need a clean out - havn't had a real one for a loooong time.
Some will win, some will be slaughtered - its the market. People will learn about risk again having had it all been removed for so long.
Anyone who thinks 2% to 3% interest rates were sustainable is .... well ....
BUT Low unemployment, higher wage increases, boomers spending as they have a time frame left to do it, Immigrants with USD, Euros, Pounds getting a lot more NZD plus some political parties spending more or others giving tax cuts (all as bad as each other) could mean rates are going to have to go a lot lot higher than we think.
Buckle up, get the popcorn and sit back and watch it unfold.
Just like in the movies ...lol That is madness , why on earth would you want to crash your economy just for the sake of having a clean out? The idea is absurd...lol Id rather see the regulators regulate a softer landing for all...wage freeze, rent freeze , price freeze...freeze hell if they have to ,better than sitting with the popcorn watching crime run rampant. We dont have to follow the Fed into unsustainable should they go there (and I doubt they will hike much more after their next push) ....We can ride it out....have our cake and eat it too....lol
Pumping asset bubbles - especially in property is a very stupid thing to do in the first place. And having central bankers and politicians encouraging it is even worse. Which is what we have had for the last 10+ years.
So the madness isn't ahead of us - the madness has already happened.
Families do what they have to, to survive. Cut back, stretch the weekly shop to 8 + days, cheaper products, smaller more frequent fuel stops, less trips to the cafe.
Cash is king New Zealand, and it is better off in my pocket so I can survive future shocks that are immanent.
Is the RBNZ over-estimating its ability to affect people and their spending patterns with higher interest rates?
In short, YES, the RB needs help form the government in providing more qualified immigrant labour to NZ ato alleviate the worker shortage, the OCR alone can't sort inflation on its own
How about if we provide houses for all the poor F-ers living in motels first?
I just found out that there is a young mum with a 4 month old baby sleeping in her car in the park down the road. You think that baby will grow up to be a ram raider? Seems almost inevitable. Its little 4 month old brain is absorbing the trauma of homelessness, and it will be disadvantaged for the rest of its life.
Let's house all KIWIS first, before jamming our country up with yet more immigrants.
For me, I think the worst case scenario here would be if there are sufficient numbers of people in the community, either who don't have mortgages or are earning lots, who will be impervious to whatever the RBNZ throws out at them.
Why this would be bad is that the more the RBNZ is tempted to push rates higher because it's not apparently getting the traction it wanted, the more there is the risk that those in a precarious position may fall over.
We could see a very uneven situation develop where the haves keep on having and the have-nots suffer.
You absolutely hit the nail ont he head David, I hope others will come to realise this as well.
Too late there Yvil - we're already in the position that David warns about regarding the haves and have-nots.
Driving the divide even wider risks complete social breakdown - and that historically is very bad for capital markets/asset prices. Why? Because there is no trust between debtors and creditors.
Its not new and its the only way unfortunately.
Inflation needs to be managed, employment reduced and house prices need to drop (rbnz uses the term sustainannle house prices i think).
So the rbnz intends to hurt the economy by raising interest rates..once the economy stalls.. some businesses fail and lay off staff and house prices drop another 20%-40% or so .. i imagine they will then hold interest rates (they wont drop them as there will be no appetite for moving backward). To achieve said outcomes much higher mortgage rates will burn many leveraged up people.
Country will be much better placed for growth and better place to live afterwards. Think affordable housibg for young professionals (nurses, bus drivers, teachers etc), stronger businesses etc etc
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