RBNZ will update the OCR today
Interest rates are rising, but it may be the end of year before Kiwi households feel the full effect of the increase, economists said.
The Reserve Bank has been predicted to lift the cash rate by 50 basis points on May 25, which would take it to 1.5% – the highest level since 2016. Compared to the last time the OCR was at this level, mortgage rates were already much higher, partly reflecting that the market expects more cash rate hikes were likely.
Earlier this year, a Reserve Bank analysis showed that nearly 20% of recent first-home buyers would face serviceability stress if mortgage rates rose to 5%. And at 6%, this figure would rise to nearly 50%, and would also put investors and some existing owner-occupiers under pressure.
Already, two-year rates were already over 5% and were tipped to increase.
In its most recent Financial Stability report, RBNZ said newer borrowers would be the most exposed to surging interest rates and declining house prices because they would have repaid less of their loans and could have had their ability to service a mortgage assessed on lower rates, Stuff reported.
“The proportion of risky lending, that is lending at both a high debt-to-income ratio and loan-to-value ratio, increased sharply for all three buyer groups in recent years,” RBNZ said.
Risky lending to first-home buyers had declined in recent months, however, after loan-to-value rules were tightened, the central bank said.
Jarrod Kerr, Kiwibank chief economist, said rising interest rates would “put handbrakes on” by the end of the year.
Kerr said 60% of mortgages were on floating rates, or would refix within the next 12 months.
“By the end of the year most of that will have cleared, and you’ll have people who were fixing at 2% or 3.5% all of a sudden fixing much higher than that,” he told Stuff. “There will be some stress out there by the end of the year.”
Sharon Zollner, ANZ chief economist, said when any asset turned, the people who were most stressed about it were the ones who entered the market most recently.
“In aggregate, the household debt-to-income ratio isn’t that much higher than it was in 2008,” Zollner told Stuff. “Households should be able to handle, in aggregate, higher mortgage rates. Banks have been testing throughout that people can pay higher mortgage rates than the rates of the day.”
She said if the OCR reached 3.5%, bank rates would be near the rate that had been checked.
“At the moment there’s a squeeze on from the cost of living – no one would have expected 7% inflation when they did those tests but of course incomes will catch up,” Zollner told Stuff. “Our view is more that the level of house prices is the weaker link in the chain and that will determine how high the OCR can go before the wheels fall off.”
Mortgage adviser David Windler said he was not seeing people in trouble yet, as many borrowers would have fixed for longer terms a year ago.
Loan Market’s Bruce Patten, meanwhile, said many people had been told to keep their payments the same when interest rates dropped, so were not struggling now.
“I am sure there are some people under stress, but hopefully not as many as the RBNZ assumes,” Patten told Stuff.