The majority of New Zealand homeowners are likely to experience further interest rate increases in the next year, according to new data.
Figures released by CoreLogic on Monday show the country is facing a “refinancing wave” as the Reserve Bank of New Zealand (RBNZ) hikes the Official Cash Rate (OCR) in a desperate attempt to tame stubbornly high inflation.
Inflation has been sitting at 7.2 percent for the past two quarters, down ever so slightly from its peak of 7.3 percent in the June 2022 quarter but still well above the 1 to 3 percent target.
The RBNZ has repeatedly hiked interest rates in an attempt to engineer a recession and dampen spending. The OCR has shot up from 0.25 percent in August 2021 to the current rate of 4.75 percent. Further increases are also broadly expected in the next review in April.
CoreLogic NZ Chief Property Economist Kelvin Davidson said homeowners are facing steadily increasing mortgage costs.
Around 60 percent of home loans are likely to see further interest rate increases over the next year or so.
“Currently around 50 percent of existing loans (by value) are fixed but due to be repriced within the next 12 months, and another 10 percent are floating. In other words, about 60 percent of loans are likely to see a further rise in interest rates over the next year or so,” Davidson said.
“Clearly, this means that many households will need to readjust their budgets and that will remain a restraint on the wider housing market for a while yet.”
He said another issue facing borrowers is a significant number who are refixing in the next year will be coming from very low-interest rates to substantially higher ones – which is likely to cause some financial stress. In fact, some will be facing cost increases of nearly $10,000 a year.
“We don’t know precisely when all of these borrowers originally took out their loans, and therefore the starting interest rates they are changing from. However, if we make the reasonable assumption that a lot of borrowers have simply been on a series of rolling one-year fixes, the change that many will be seeing as they reprice is still in the vicinity of 2-3 percent for most of 2023.
“As an example, for somebody repricing from 4 percent a year ago to 6.5 percent now, the increase in mortgage repayments on a $500,000, 30-year mortgage, would be around $9275 per year,” he said.
Davidson said thankfully, despite the challenging economic situation and extra costs being piled on borrowers, households are showing resilience.
“It’s worth noting the repricing process seen to date has been fairly smooth. So far, loan repayment problems and non-performing debt on the banks’ books remain very low, even though many borrowers have already moved from the ultra-low 2-2.5 percent rates onto a higher level.
“However, we should still be mindful of recent Centrix data reporting a lift in borrowers missing repayments.”
Another factor that will work in borrowers’ favour is while unemployment is expected to rise over the coming months, the RBNZ has predicted fairly minimal job losses.
Davidson said unemployment is expected to tick up mainly because more people will enter the workforce but job creation is expected to slow down. This means people who already have a job and mortgages should be “somewhat insulated over the coming months”.
But he said new entrants to the workforce who are aspiring to own a home will face tougher conditions.
“We’ll be keeping a close eye on this repricing process, and watching for any signs that bad debts are appearing which might potentially lead to mortgagee sales (although even that is a last resort),” Davidson said.
“But the projected resilience of employment is a helpful buffer, and by the end of the year, we suspect that this mortgage repricing flow will have become less of an issue – as most repricing events from then on will be from ‘high to high’ in terms of mortgage rates, rather than the ‘low to high’ as we’re currently seeing.”
The mortgage rate increases come as the country faces a cost of living crisis with high inflation pushing up the cost of everything.