Sharply rising interest rates could put huge financial pressure on New Zealand homeowners who bought at the peak of the country’s overheated housing market, economists have warned.
Experts say New Zealand has become the “kiwi in the coalmine” for the world’s property markets, as rising interest rates and falling house prices put some borrowers at risk of negative equity, where they owe more on their mortgage than their house is worth.
“If you map our rent-to-house prices and income-to-house prices, New Zealand is in a world of its own,” said Dr Michael Rehm, a senior lecturer in property at the University.
“The world is paying a lot of attention to what is happening here – because we are the most cockeyed, you’d think we would be the first to fall over.”
The Reserve Bank’s second annual report into financial stability, released this week, says the country financial system is well placed to support the economy. But the news is grimmer for buyers who pulled together huge deposits to buy a home at the height of the market in 2021, when house prices were at record highs and interest rates at record lows.
“Those who took out loans with high loan-to-value ratios during this period are particularly exposed, as much of the equity in their properties is likely to have been eroded,” it noted.
New Zealand has been plagued by a runaway housing market for years, but since November 2021 house prices have dropped by 11%, with declines of 15% in Auckland and 18% in Wellington.
At the same time, interest rates have been creeping up alongside the official cash rate, as the Reserve Bank attempts to curb inflation that hit a 30-year-high in July. The central bank is expected to hike the official cash rate further in mid-November, which could see interest rates rise again.
While the number of borrowers in negative equity remains small at around 2%, that figure could rise considerably if house prices were to fall by another 10-30%, the report said.
Many borrowers from late 2020 to early 2021 fixed their lending at low rates for one or two years, but are now faced with much higher interest rates.
People who bought during that period make up about 40% of the mortgage stock across the country, with 10% of those first home buyers. Roughly half the mortgages on fixed rates are expected to rise before the year ends, which the Bank noted would “increase serviceability pressure” on borrowers.
New Zealand – while not alone in fixing mortgage rates for one to two years – has one of the highest proportions of short-term fixed interest rates globally, making the country more exposed to the risks of a fluctuating market.
“The term of the fixing is so much smaller than the maturity of the loan – you’re always going to be exposed to changes in interest rates,” Rehm said.
House prices across the globe skyrocketed during the pandemic, with money flooding the market because investing in property was thought to be “as safe as houses”, he said. Now with inflation, restrictions on lending and rising rates, that money has reduced to a trickle, Rehm said, adding that New Zealand’s market is an extreme example.
Rehm said negative equity was “the kiss of death” for homeowners but that owner-occupiers are less likely to sell in this market, compared with property investors who may have multiple dwellings.
“It is really terrible for first time homebuyers because they lose that equity they’ve been saving for all these years and, in a lot of cases it’s their parents on the hook too, so it’s multigenerational stress.”
Infometrics economist Brad Olsen said while the prospect of negative equity was concerning for some households, the “greater challenge … was people’s ability to make repayments”.
The financial stability report showed that if interest rates were at 7%, nearly half (46%) of all those who bought last year would need to spend half of their income on mortgages.
“[There] are going to be some people that haven’t been service tested, and that aren’t necessarily good for those loans anymore – that does create some real risks and concerns for those households,” Olsen said.
