Westpac New Zealand CEO Catherine McGrath says home buyers who bought for the long-term at house price peaks in 2020 and 2021 shouldn't be worried about the current value of their property.
In both Westpac NZ's annual results and interim results last year McGrath said falling house prices shouldn't worry recent buyers in it for the long haul.
The NZ median house price peaked at $925,000 in November 2021, according to the Real Estate Institute of New Zealand, and had dropped $150,000, or 16%, to $775,000 in the latest figures, for March this year. The Reserve Bank last week said 25% of new loans stress tested by banks at specific interest rates in 2020-21 are now above those stress test limits.
Since the average bank carded, or advertised, two-year mortgage rate bottomed out at 2.514% in June 2021, it has risen to 6.491%.
Speaking to interest.co.nz after Westpac NZ announced interim net profit after tax was down by a third, McGrath said she would "absolutely" still say falling house prices shouldn't worry home buyers, who bought at price peaks, who are in it for the long haul.
"If you've bought a house and the price [value] of it has gone down and you're looking to refix [your mortgage], we will refix you. There's no penalty or consequences of the fact that your house has fallen lower in value. So if you don't intend to sell it, you're still looked at and considered in the same way as you were at the time that you took the original borrowing out," McGrath says.
"We [recently] led the market with a 5.99% three-year [mortgage] rate. One of the reasons is because it's a rate that we know that even those customers that borrowed at that particular point in time, that that's the rate that we stressed them at and so it's a rate that they should be able to afford."
McGrath says about 93% of Westpac NZ's mortgage portfolio has a loan-to-value ratio below 80%.
"Negative equity's only an issue if within relatively short order you need to sell," McGrath says.
Westpac NZ is "keeping a close eye on" customers who bought around house price peaks and were stress tested at 6%.
"So far everything's looking good. But they're stepping into turning over their fixed rate mortgages now."
She says one-in-three Westpac NZ home loan customers still have "at least one" fixed rate of 4% or less, and 67% of the bank's customers are still ahead on their repayments.
"We're seeing many customers who can be resilient to what's happening at the moment," McGrath says.
She says about 100 basis points of increased cost of borrowing has already flowed through.
"But because of the fixed rate levels that we have in New Zealand, we think there's still about 160 basis points to go, and that won't peak until early next year."
Parent the Westpac Banking Corporation said Westpac NZ's 90+ day mortgage delinquencies were at 0.29% at March this year, up from 0.22% at September last year. Its 30+ day mortgage delinquencies rose to 0.69% from 0.47%.
"In terms of what we're actually seeing today there's only a small number of customers where we can see that strain increasing and it's lower than pre-Covid levels," says McGrath.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
46 Comments
They will be fine RP, 99% will come out the other side and see their property go up in value. They will not be at the whim of a landlord, be able to paint their kids rooms and have pets. You on the other hand, will always be the "glass half-empty" type. I know where I'd rather be.
TeKooti, I'm in no doubt that those in negative equity will find your comment momentarily reassuring :) The next glass 1/2 empty headline is probably only hours away. Be mindful not to trivialise the seriousness of individual situations. I on the other hand are looking out for buying opportunities (glass 1/2 full)
We have all taken paths in life we may have done differently with the benefit of hindsight. What is your point, do you take pleasure in this because it seems you do? Most housing markets that went into negative equity came out the other side, recovered losses and are now a lot higher. Mortgagee sales are still pretty much non-existent and I really havent seen any panic sales anywhere.
Not sure that is accurate. Based on my cursory inquiry, the IRD would only recognise loan losses that are demonstrably unrecoverable i.e. bad debts, otherwise as you say, banks would simply defer tax liabilities. But certainly loss provisions (based on statistical predictions of loss the loan book) can be used to smooth profits to protect bonuses of execs.
Exactly. Catherine McGrath is trying a bit too hard to be Pollyanna here. Negative equity is a real problem, both for the borrower and the lender, regardless of whether the property gets sold or not.
For the lender it means that the loan is now undercollateralised. For the borrower, it means they have a debt overhang which they can't deal with if they lose their ability to service the loan. Both of these situations represent an increase in risk, which is what the loan impairments are supposed to account for.
Crazy to think some people and speculators are at 9 x DTI levels, small rate rises put huge financial pressure on them when refinancing with rates 5% higher many will have to sell at a loss or could lose the lot. I have seen this myself in Uk back in late 1980’s was 12 years to recover people were just dropping key off to banks. Obviously the debt is a lot more now as DTI was only 3 times just interest rates went sky high.
Negative equity might be a long term issue if prices don't go back up - most people who bought in the last 5 years have paid very little off their principal. Note that Japan and Ireland have barely caught up to their crashed prices... from 30 & 15 years ago respectively..
Negative equity might be a long term issue if prices don't go back up - most people who bought in the last 5 years have paid very little off their principal. Note that Japan and Ireland have barely caught up to their crashed prices... from 30 & 15 years ago respectively..
Our bubble is far bigger than Japan's. Property value to GDP topped out at approx 3x GDP in Japan at the peak of their bubble. Ours has been up around a factor of 5.
There's a real expectation that interest rates are temporarily 'high', they will shortly go back to 'normal' once they've hit the peak (which is ever revised upwards), and that house prices 'always' recover. I'm so sick of watching a housing market that defies gravity inflate house prices to the point where only first home buyers with parent's assisting them have a decent shot at buying. I'm in my early 30s, bought a house in Wellington for 700k back in 2019 - I'm pretty sure it's not far off that value now. I'm one of the lucky under 35s who earns enough to buy without help (I'm a data analyst). I'm willing to take the financial hit if it means we get a proper 'reset'. Meanwhile the last time interest rates were this high the median house price was like less than $400k.... the current median house price of $750k upwards is far too high.
We are now at the edge of the cliff for those who bought during the peak. We could see some real trouble ahead if rates rise further, however I can see either bank or government intervention to help distressed home owners because we are talking relatively few people. The backlash from the DGM's could be something else again, however they are also relatively few in numbers, after all I think all of them are on interest.co.nz.
No, not under the current high inflation environment, bank or government won't intervene to help. If they do, that will push inflation rate higher. The government has other priorities, there are so many areas need money and funding. In the end, the government will save economy than saving assets owners as it's economy who keeps the society and country running.
however I can see either bank or government intervention to help distressed home owners because we are talking relatively few people.
Wrong. The bubble affects all home owners, not just those who got on the train in the past 3 years. Why? Because the bubble has been seen as a savings vehicle for 20-odd years. If house prices double every 7-10 years, there is less psychological tension about saving for a rainy day. This creates all kinds of problems.
Very true, and another reason this long awaited reset is good news in the long run. Hopefully this period will quash the stupidity of the "houses always go up" mob.
As I've stated before, I think we are close to the bottom for residential property, but I don't see it taking off in a hurry even if rates go lower than expected, because (hopefully) the horse has now been broken.
I wouldn't consider what is happening now as a "reset". It's not extreme enough.
Even dropping to pre-COVID prices isn't a reset.
A true reset would be house prices dropping back to 2010 prices, and then adjusted for inflation to today. This would wipe out all gains from the housing bubble that started around 2015, essentially halving house values, but add in the reasonable capital gains that would be expected if housing wasn't pushed as the #1 investment vehicle.
If this happens, a LOT of people are going to feel the pain. If they don't it's not a crash or a reset.
Do you think MP's, the majority of which are property investors, and some leverage trusts to pay less income tax, are going to let that happen? Of course not. They also don't want to risk their golden parachute of landing a cushy job on some bank's board.
Am I wrong? I hope so, but in all honesty I don't think I am.
I posted this Nov last year so apologies to those that have seen it before
http://www.davidmcwilliams.ie/arrears-and-the-paradox-of-aggregation/
See the graph in this post (also note, people who warned of it happening were also labeled DGMs)
Arrears always start as a very small percentage and then grow - the same happened in Ireland and in the end, they had to bail out the system of sorts
The scary part is in Ireland interest rates were halved, and yet still the arrears kept climbing to the point of a bail-out.
Ironically this implies the best move for the government now is to launch enormous stimulus on infrastructure to catch the soon to be unemployed construction workers and drive demand, to in turn, support the economy. Deflationary debt spiral is gonna be a nightmare otherwise. Austerity is the wrong move.
Imagine if the OCR was dropped to 0.25% AND mortgage test rates were still kept at 8%+? Less borrowing demand out of the RBNZ for speculating on housing, and more that could be lent to....say....local councils for infrastructure spend.
- March 2023 - existing lending = $340b.
- March 2019 - existing lending = $260b
$80b in 4 years.
What will it cost to fix our water infrastructure?
It’s estimated that $120-$185 billion will need to be invested in our water systems over the next 30 years.
https://www.dia.govt.nz/three-waters-reform-programme-frequently-asked-….
Yes. The RBNZ were naive to think that the money they lent to banks at exceedingly low rates was going to be used for supporting businesses, infrastructure or the economy.
Or incompetent. Either is not a good look for them, but what do they care? For all the trouble they caused, not one head at the RBNZ has rolled. In fact, they probably all got pay rises. I wonder how many bought property in 2020? Would that be considered unprofessional conduct, a conflict of interest, or some-such?
Oops. Dropped the long term test rates based on short term data.
Many comments out there that young borrowers should have known interest rates couldn't stay low forever.
What about the banks with access to swathes of data and resources, were they unaware? Maybe there's some malice involved?
True, although most people realize the Government are clueless. That said, why does the lowering of the OCR need to result in the lowering of the test rates? What's wrong with a negative OCR and an 8% test rate on a mortgage? People end up borrowing smaller amounts AND enjoying low mortgage rates. Would the economy collapse?
Typical move along, nothing to see here comment from the banks. Contrast these statements with this article from Feb 2022 with the banks making overly optimistic and incorrect forecasts that the OCR is likely to be 3% by April 2023 (try 5.25% instead) https://www.stuff.co.nz/business/money/127840572/anz-this-is-the-intere…
"ANZ’s expects the OCR to rise to 3 per cent by April 2023, providing the economy evolves as expected."
"Recent Reserve Bank analysis showed that if mortgage rates rose to 5 per cent, nearly 20 per cent of recent first-home buyers would face serviceability stress.
At 6 per cent, this would rise to nearly 50 per cent, and investors and some existing owner-occupiers would also be under pressure."
We're well in the 6% range, but the banks are still telling us everything is a-okay. Something doesn't add up here...
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.