Reserve Bank says there's no sign that higher servicing costs are as yet translating into substantive increases in the level of arrears or stress in commercial bank home lending portfolios

Buyers who bought houses at the peak of the market in 2021 are facing substantial increases in mortgage interest costs, but they are coping - at least for now, according to the Reserve Bank (RBNZ).

Between the middle of 2021 and the middle of this year fixed mortgage rates effectively doubled to be well over 5%.

RBNZ Assistant Governor/General Manager Economics, Financial Markets and Banking Karen Silk said: "Obviously there was a cohort that purchased at the peak of the market around that 2021 period.

“At current mortgage rates we’d estimate that somewhere between 25% to 50% of first home buyers who bought in 2021 if they were on those [new higher] rates today they would have to significantly cut back their spending," she said.

But she noted that at the time the loans were provided, banks were stress testing home loan servicing at or above the higher levels now prevailing.

“What we haven’t seen certainly to date is that higher servicing costs are translating into substantive increases in the level of arrears or stress in commercial bank home lending portfolios.

"...And you can take it that this means households that have moved on to those higher payments are coping, at least for now.

"It doesn’t mean [though] that there isn’t pressure with inflation more broadly impacting the cost of living and not just interest rates and that’s why we need to continue to focus on reducing inflation."

Silk said the RBNZ was keeping track of how households were coping with higher rates through a vast variety of data that it collects and observes.

While there has been some easing of commercial bank fixed mortgage rates in the past few weeks - as wholesale rates have fallen a little - Silk said mortgage rates may stay somewhat higher and for longer than some people think.

“If it pans out the way we think things need to pan out today based on the information we have in front of us today then you could see mortgage rates pitched up for a bit longer than maybe the market might expect them to.”

The RBNZ hiked the Official Cash Rate by 50 basis points for the fourth time in a row last week, taking the OCR to 3.0%. The central bank's forecasting the OCR to peak just above 4% early/mid next year. 

Crucially though - and this is where the RBNZ and those in the market place are starting to diverge a little - the central bank sees the OCR holding up over 4% till well into the second half of 2024.   

Silk concedes there have been those in the market who believe the RBNZ will need to cut rates earlier, but believes "the market is gradually building its picture" now.

"The three out of the five major banks [Kiwibank, ASB, BNZ] that hadn’t lifted their OCR forecast to 4% have now done so.

“I think there’s some recognition there around that we’ve still got heightened near term risk still there around inflation.”

Silk noted the strong starting position of the economy, with things like high savings rates and the tight labour market at the start of this OCR hiking cycle. 

“There’s still some conditions there that mean that demand will take a longer period to just reach the level that it needs to in order to get that balance between demand and supply.

“There are different market views around how quickly that will or will not appear.”

In terms of the recent easing in fixed mortgage rates since July, Silk said commercial banks "make own call".

“In lower credit growth periods competition does pick up and you often see specials, which is what we are seeing in the market at the moment to attract that kind of new flow.

“That’s not something we can control nor do we determine those prices. With the commercial banks they’ll make those decisions themselves.

"What I would note is that the banks had already largely built future OCR increases into wholesale rates and mortgage rates.

"Some of the higher rates that we saw in June - we saw that spike up - reflect in part higher levels of volatility in global rates, which led to higher wholesale rates and subsequently mortgage rates here.”

Silk said a good example of that was the first 75 basis point US Federal Reserve hike earlier this year, which saw our two-year swap rates going to 4.5%.

“We can control that short end but the market’s going to determine what it does with longer term rates."

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