Even relatively slight increases in mortgage interest rates could present significant challenges for the housing market

A timely article to remind those with large mortgages to start paying down the principal as quickly as possible while interest rates remain low. If they cant afford or discipline themselves to pay an extra $137 a fortnight in paying down their $500,000 mortgage now, then they are not going to be able to pay that extra 1% interest rate increase.
A couple of points regarding money management:
- Those who were extended and needed to take out interest only mortgages need to start urgently paying down debt now. With reducing mortgage interest rates they are probably currently feeling greatly relieved and potentially can do this; however, not to do so mean that they are potentially sitting of a growing ticking time bomb.
- We have probably lost sight that paying the mortgage down - after clearing credit cards - is arguably probably one of the best forms of saving with best return, "tax free", and no risk. Generally, principal paid down is accessible in the form of an overdraft facility; although this may be at a higher rate, it is one the cheaper forms of credit and can be quickly paid off. KiwiSaver probably remains the best saving option but funds are not accessible until 65.

Realistically, 4.99 and 5.99 are still such low rates if viewed over the long term. That home owners are already so stretched, and such small increases could have such large effects, is terrifying. But that's what happens when home values are so insanely high.

When the US market tanked during the GFC, it was rates in large part that did it. The interesting difference is that over there you can fix your rate for 30 years. Imagine that. A 30 year fixed rate widely available and yet so many borrowers took the punt on a temporary lower rate (because worst case scenario, of course you'd just sell if the rates jump. Unless you can't) that the house of cards fell. And home values (and hence mortgage balances) in the worst hit states like Arizona, Florida, Nevada and California were far lower than here, with the ratio to income far more attractive.

Those with 10% down on their $1m+ McMansions on the fringes of Auckland face tough times ahead.

There are always those people who get themselves donkey-deep in debt - and don’t have the means (or wherewithal) to save themselves when things get tougher.

But I’d wager that a large majority of people have enough acumen/wisdom to know that today’s low interest rates won’t last forever - and factor that into their consumption & investment decision-making.

Nonetheless, if some people go to the wall, then that’s a standard market response - as unfortunate as that may seem.

Nothing new.

TTP

Barfoots, new listings over past 6 months 7468, sales 4165. Yet stock on hand at 4684 is lower now than 6 months ago.

During the heady days, not long ago we could sell Auckland , at least the housing stock at a remarkable rate approaching every 11 years. Currently on six month rolling basis it would now take 29 years. Do not expect price rises.
Using the very simple median pricing , with all its flaws, and all the other factors aside, Auckland homes purchased from June 2016 , about 70000, or around 11 percent of stock, if sold today would reap a loss.
If interest rates rose there would be only one outcome.

The black cloud of RBNZ rules could also constrain the big banks NOT to further gouge the customers but to make up their capital from earlier profits or sell up and leave.

Even at a 2% increase in rates, for the amount I'd have to borrow the difference in repayments vs. what I currently pay in rent is marginal... I suspect there'll be another great flight of the youth across the ditch if things don't start to look up for non-occupiers soon.

I have seen so many in their 30s indulging on latest iPhone, new Mazda 3, VW Golf, overseas trips, etc on their revolving mortgage account. Perhaps I am a bit too old to keep up with the new thinking!

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6% rates should not be a problem for most people, they will just have to stop wasting money on cars and overseas holidays every year and pay off the mortgage instead. The lowest mortgage rate I ever had was 6.4%, for most of my term it was 8.6%. What frightens me is how common it is for people to have pretty much the same mortgage as they took out 20 years ago as they are simply not repaying it in the hope their house price keeps doubling every 10 years.

The only way to keep house prices up is immigration & that's the current setting. Our birth rates are abysmal, especially among the educated classes & this is standard fare for most western cultures. Winnie & Labour both campaigned to reduce it but the reality is, if it stopped or was lowered significantly then house prices would really be in trouble. Another case of Labour being totally ignorant of the reality prior to the last election after 9 years in opposition.... doing nothing. Since then a rabble of committees for the faithful few trying to reinvent socialism for the new millennium, which will continue until the end of 2020. Really?
Stephen Fry said last year on BBC television in a debate about left-right politics. "It's not the Right that have let us down globally, it's the Left." Even he knows it.

Not savers, the saved.

1) The timing of this article is a bit odd given that just last week Westpac joined other banks in very significantly lowering interest rates for long terms (4 & 5 years), thus giving certainty of longer rates for longer.

2) The capital requirements will likely increase rates but the consensus is by about 0.4%

3) If interest rates were to increase by 2% or more (and they're not in any foreseeable future as you can lock in 5 years fixed at 4.39%) NZ would head into recession because a lot of money that is currently spent into discretionary items will be redirected to interest payments leading to many businesses suffering, leading to some businesses closing down, leading to employees losing their job, meaning they will spend even less… a downward spiral.
If interest rates were to to increase by 2% or more, then I would join the ranks of those who believe that the real estate market will depreciate significantly in value, possibly 20% +

not going to happen nothing to see here
the days of high interest are long over with the debt creation that created the world debt mountain
we will have long interest rates for a long long time as well as QE in many forms
to help people service the debt, otherwise we would have a GFC2 and it would make the last look like a blip

If you can get rid of of all your debt (or reduce as much as possible) just do it ! The big 4 banks and all their "hangers on" have had it SO GOOD for SO LONG ! ...time for a change and to get out of this "casino" economy based on residential housing stock ! Let the banks earn their money through investing in R&D, new ventures, new or expanding businesses etc etc ...not through salary and wage earners pay packets ! What makes this even worse is that you go out there and run your business like a bank - you would be charged with "money printing"ie forgery !!! .....always remember the bank is NOT your friend.

Banks stress at 7.5% anyway to check affordability even if the actual rate is 4%.

If we have a crash, and the reserve banks around the world do the same thing they did last time, then:

1) The banks would be bailed out.
2) Interest rates would go to 0 in NZ. Overseas they have no wiggle room... maybe go negative?
3) So savers punished, borrowers rewarded.

So load up load up that debt :)

The RBNZ changes to capital requirements are unlikely to have a huge impact on rates - NZ owned banks that don't use internal models won't be hugely impacted, and will limit the scope of the big four to pass on rate cgabges.

What is far more likely is that the Big Four will reign in the amount of credit they are willing to issue. The use of internal models makes it profitable to issue credit to marginal buyers ... standard models will require significantly more capital for these same borrowers. It will start at the fringes and highly leveraged investors and FHB's with low equity will find it increasingly difficult to obtain credit.

Just as it occurred in Australia the availability of credit will be the primary cause of price falls over the next couple of years.

Banker Gangsters