Tough times: Why advisers should be empathetic to clients

Mortgage expert paints stark picture of NZ economy

Tough times: Why advisers should be empathetic to clients

New Zealand's economy is going through a rough patch, and mortgage advisers should be empathetic to clients who are feeling the heat, according to a senior mortgage expert.

During the Financial Advice New Zealand webinar, Bring in the Experts: Post Budget Webinar – Economic and Consumer Impacts, John Bolton (pictured above), founder of mortgage brokerage and lender Squirrel, painted a stark picture of the New Zealand economy.

“There’s a lot going on at the moment and you need to think about the impact that’s having on end consumers,” said Bolton. “For those of you who are out there that are mortgage advisers, you’ll be living and breathing this stuff every day.”

Symptoms of a tightening cycle

While earlier on in the webinar ANZ senior economist Miles Workman explained why an economic downturn was necessary for the New Zealand economy after years of increased spending, the reasoning doesn’t soften the blow for those caught in its repercussions. 

Sustained high interest rates

To help curb growing inflation, the Reserve Bank lifted the official cash rate (OCR) to 5.50%. But with inflation proving sticky, the central bank has adopted a hawkish tone warning that rates will stay higher for longer.

However, Bolton said RBNZ was just “jawboning the market” to get wholesale interest rates back up.

“The wholesale markets are betting against the Reserve Bank – the Reserve Bank is not forecasting the OCR decrease until the end of next year,” Bolton said. 

“The markets are very much forecasting a reduction at the end of this year or early next year – and certainly that's where my money would be.”

Whichever way it goes, interest rates will have a continued effect on New Zealanders who now must grapple with rates tripling in three years.

“Clients who were previously on fixed rates as low as 2.8% are now facing renewals at rates as high as 6.85%,” Bolton said. “This puts a massive strain on household budgets.”

Increased mortgage defaults

Another symptom of a downturn is that many people are struggling to meet their mortgage obligations.

Bolton said that it’s been “really noticeable” that people are struggling with their mortgages.  He pointed to the recent RBNZ data that found non-performing residential loans were up 7% month-on-month to $1.9 billion.

“It's getting pretty large right? It's almost doubled since last year. And we're seeing that like with these high interest rates, it really is starting to bite,” Bolton said.

Savings running dry

While some Kiwis may have had a financial buffer built up, these savings are quickly being depleted due to rising costs.

“I think people have had a savings runway, but that savings runway is definitely running out,” Bolton said. “And we're certainly seeing a lot more issues in the last two or three months than we've seen before that.”

Weakening economic indicators

Business confidence is down, retail sales are weak, and a record number of Kiwis are emigrating. These signs point towards a potential economic slowdown with rising unemployment.

“We’re starting to hear and see out in the streets is people struggling that they can't get overtime, seeking jobs, or they're in households where one of the people in the households losing a job or going on to reduced hours,” Bolton said.

Underemployment will also be a significant issue, according to Bolton.

“I'm certainly seeing a very significant increase in youth underemployment. I think we've got a lot of young people that are extending time at university, extending time at school. We've got a lot leaving to go overseas at the moment, and I think that's reflective of the jobs market,” he said.

“With older borrowers, people that would naturally be thinking about sort of lifestyle work and starting to wind down. I think you're going to see high levels of underemployment there as well. That's one of the areas that gets hit quite quickly and as part of the tightening cycle.”

Strained construction sector

The construction industry, heavily reliant on easy credit, is facing serious challenges due to rising costs and a lack of projects. This could lead to further economic woes.

Bolton said there is “some serious trouble brewing there, and it’s been brewing or a while”.

“We've seen it coming through in terms of liquidations, which are up significantly. A lot of the guys have been surviving on savings and assets, but they are running out of runway,” Bolton said. 

“So, I'm expecting a lot more trouble in the construction sector over the next six months, because they’ve been delaying for that recovery. And it's just not coming. It's just not coming fast enough for them.”

“I think 2024 is going to shape up to be a pretty bad year for the construction sector.”

Policy changes: Bright line test and thee First Home Grant

The removal of the First Home Grant and the extension of the bright-line test to two years are impacting the property market in different ways.

Bolton said that while the grant removal may not significantly affect first-time buyers, he still thought the move was a negative one.

“Whenever you remove a subsidy or a cash freebie for people, it's always going to be negative,” Bolton said.  “I don't think it's going to reduce the number of people that are able to buy by too much because I don't think deposits are the main issue at the moment.”

“It's very much around affordability and servicing, and we've still got the first home scheme there, which allows for as little as a 5% deposit. So, still options there for first time buyers.”

However, the extended bright-line test could lead to more properties coming onto the market at a time with already low buyer demand.

Because of the bright line test, Bolton said he had encountered some situations where he was unable to structure the client’s property portfolio.

“It may have prevented them from selling a property when they really should have, and that we're holding off selling stuff because of the bright line test. I think with that coming back to two years, that’s going to allow for a bit more portfolio management,” Bolton said.

“However, you could see more properties coming onto the market at a time when we've already got a lot of properties on the market, and not all that many buyers. So, there's something to look out for.”

The human cost of economic downturn

Of course, these economic factors all have a direct impact on everyday people. However, Bolton said it’s easy to forget this.

“We must not brush over this lightly. What I find happens quite a bit – and I’ve corrected myself and other people too – is that we dehumanise it,” he said.

“The reality is, we talk about the OCR as we’ve got to take the pain. We’ve got to increase the unemployment rate. We’ve got to do all these things. But there’s always a human toll on the other side of this.”

“It will eventually get better. But I think as advisers, the most important thing for us right now is to have a huge amount of empathy for our clients.”

Bolton also said mortgage advisers are on the front lines, witnessing the stress and anxiety their clients are experiencing firsthand as they struggle to afford their mortgages.

“Because of this, I also have a huge amount of empathy for advisers because it’s tough. This is a tough part of the cycle.”