Higher rates and falling prices hammer Kiwi homeowners
NEW Zealand’s property market has gone from one the hottest in the world to being at the forefront of the painful unravelling of the pandemic-era housing boom.
The nation’s homeowners are facing a double whammy of tumbling house prices and rising mortgage costs in 2023, with about half of home loans due to refinance this year at higher rates.
It’s seen as a harbinger of what’s to come for other countries. The South Pacific nation of 5 million people saw home prices jump almost 30 per cent in 2021. Now, the Reserve Bank of New Zealand’s (RBNZ) aggressive tightening of monetary policy to rein in inflation is causing a correction that’s ahead of those underway in countries such as Canada, the UK and US.
Kiwis tend to fix their mortgages for less than three years. The central bank estimates about half the stock of fixed-rate mortgages is expected to reprice this year, meaning homeowners face a jump in interest rates from historically low levels of 3 per cent or less to at least 6.5 per cent.
Former Prime Minister John Key, who is now chairman of ANZ Bank New Zealand, describes this impending financial burden in stark terms: A person who borrowed NZ$1 million (S$845,600) at the beginning of 2022 would have paid around NZ$35,000 towards their mortgage. That same loan will now cost around NZ$65,000 a year.
“It’s not at all uncommon for a first-time buyer to have a mortgage of NZ$1 million in New Zealand,” Key said. “It’s going to have a huge impact on people.”
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‘Going to be painful’
House prices in New Zealand have fallen 13 per cent since their November 2021 peak. ANZ forecasts prices will find their floor around the third quarter this year, by which point they’ll be down about 22 per cent. Rising interest rates and the housing slowdown are expected to drive the economy into recession this year as consumers cut back on spending.
“It’s going to be quite painful for a significant number of households,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “We are already hearing stories of people having to stump up most of their income [to pay their mortgage].”
The RBNZ said in its November Financial Stability Report that at an interest rate of 7 per cent, around 46 per cent of 2021’s mortgage borrowers would need to spend at least half of their after-tax income on interest payments.
“We have to have some sympathy for the newcomers to the housing market,” Kerr said. “People who have just bought a new home for the first time in the last few years — they’ve been hit with quite a shock with the rapid rise of interest rates.”
Take Zoe Taylor. The 23-year-old graduate accountant has had a tumultuous introduction to home ownership since she and her partner bought a one-bedroom apartment in the central Wellington suburb of Mt Victoria in March 2020. The pair purchased the property for NZ$550,000 before it was built, with a 10 per cent deposit and mortgage financing.
Construction was delayed due to building products being caught in pandemic-induced supply-chain snarls. By the time they finally moved into the apartment in September 2021, it had shot up in value to NZ$760,000. The couple was initially able to secure an interest rate of around 2.8 per cent, but they had to refinance in September and are now paying closer to 4 per cent.
“We have had to make a lot of lifestyle changes,” Taylor said. “Almost one of our whole salaries just goes to our mortgage payments each fortnight.”
Taylor said they are also apprehensive about what will happen when they refinance again in 2024.
“When I think about it, it stresses me out,” she said. “Our interest rates might increase again — I’m hoping not to 7 per cent because that would be where we have to make some big decisions.”
Finding a floor
Even after the 22 per cent drop forecast by ANZ, home prices will still be about 14 per cent above their pre-pandemic level and economists say the strength of the labour market means forced home sales are likely to be limited. Still, Sharon Zollner, ANZ New Zealand’s chief economist, said it’s likely that either higher interest rates or income loss will mean some people need to sell, whether they like the price on offer or not.
Key said the bank would do everything it could to keep people in their homes — including adjusting the terms of mortgages, moving borrowers onto interest-only repayments and even suspending payments for a period of time. He said the bank was starting to see the early signs of stress among its customers.
“We had four times as many calls into our contact centre the last time the Reserve Bank lifted the official cash rate than we did the time before that,” Key said. “You can see that the pain is starting to be felt and people are starting to have quite high levels of anxiety.” BLOOMBERG
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