RBNZ's 525bps tightening is still feeding through the system, economists say
Most mortgage holders enjoyed record-low rates of around 2% in 2021, but the pain is intensifying as rates soar above 7%, with homeowners who were tested at 6% now facing 9%, according to Kiwibank economists.
Kiwibank’s Jarrod Kerr (pictured above left), chief economist, and Sabrina Delgado (pictured above right), economist, said that amid the challenges posed by COVID, the record-low cash rate plunged to just 0.25%, slashing mortgage rates to the range of 2-to-3% and resulting in the majority of borrowers fixing for less than two years, with the last of those record-low mortgage rates rolling off.
Rising mortgage rates
“The important point here is that it takes up to two years for previous interest rate hikes to fully feed through the system,” Kerr and Delgado said. “The 525bps of RBNZ tightening, taking the cash rate from 0.25% to 5.5%, is still feeding through for some. The rapid rise in the cash rate, coupled with a sharp uplift in global interest rates, has seen all interest rates rise. “
Over the past two years, mortgage rates have risen sharply from the record low of 2-3% to mid-7's and 8's. The effective mortgage rate is now 5.4%, up from the 2021 low of 2.9%, and is expected to reach 6.4% by mid-2024, impacting household budgets significantly.
Higher interest rates mean indebted households will allocate a larger portion of disposable income to interest payments. The cost-of-living crisis and rising essential item prices have already stretched household budgets, leading to reduced spending on discretionary items.
“The average share of disposable income going to interest payments is also estimated to double from its 9% low in 2021, to around 18% by mid-2024,” the economists said. “On mortgaged households, it is expected to lift from less than 10% to over 20% by year end and continue higher into 2024.”
Mounting financial stress
As interest rates rise, pockets of financial stress may emerge.
Buyers based their decisions on the rates available at the time, opting for mid-2s to 3s, and were assessed on rates up to only 6%. But now, these borrowers are rolling off to rates of 7% and higher, while new loans undergo testing at 9% and above.
Low unemployment has supported households but with businesses pulling back, and unemployment increasing in this current high-interest rate environment, it’ll potentially cause more borrowers to fall into arrears. Unemployment, now at 3.9%, is expected to peak at 5.5% late next year.
“RBNZ’s estimate is a little stronger with a peak of 5.3%,” Kerr and Delgado said. “Any increase in unemployment produces a sore spot but a peak at around these levels will achieve a soft landing… Unemployment rates beyond 7% are when we start to see a more exponential rise in mortgage defaults.”
The economists noted that households with debt are paying a lot more on interest repayments, while their main asset, to which the debt is tied, has fallen close to 20% in value.
“That’s a knock to confidence,” they said. “We continue to forecast a mild contraction in economic activity, largely due to the stresses on household spending.”
Read the full article on the Kiwibank website.
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