Homeowners in New Zealand who made their purchases during the height of the country’s inflated property market have been cautioned by analysts that sharply rising interest rates might put an enormous financial strain on them.
Rising interest rates and decreasing house values have put some borrowers at risk of negative equity, where they owe more on their mortgage than their home is worth. This has become New Zealand the “kiwi in the coalmine” for the world’s property markets.
“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 the property at the University.
Because we are the most cockeyed, you might expect us to be the first to fall over, yet the world is paying close attention to what is occurring here.
The Reserve Bank’s second annual financial stability report was issued this week, showing that the country’s financial system is in a strong position to sustain economic growth. Those who saved enough for a down payment in 2021, when home prices were at an all-time high and interest rates were at an all-time low, have less good news.
The report said those who took out high loan-to-value loans during this time are at a higher risk since their equity has likely been eaten away.
A rogue housing market has troubled New Zealand for years, but prices have fallen 11% since November 2021, with drops of 15% in Auckland and 18% in Wellington.
The Reserve Bank has been increasing the official cash rate and interest rates to slow inflation, which reached a 30-year high in July. By the middle of November, forecasts indicate that the Central Bank will have raised the official cash rate again, which might lead to another round of rate increases.
Currently, around 2% of borrowers are underwater, but the researchers said that if home prices dropped another 10%-30%, that percentage would increase dramatically.
After locking in low-interest rates for one or two years, many borrowers in late 2020 and early 2021 suddenly faced substantially higher rates.
About 40% of the nation’s mortgage stock was acquired during that time, with 10% of those purchasers being first-time buyers. The Bank predicted that around half of all fixed-rate mortgage rates would increase by the end of the year, which would “raise serviceability pressure” on borrowers.
Even though New Zealand isn’t the only country to lock in mortgage rates for one to two years, it does have one of the largest percentages of short-term fixed interest rates in the world, leaving it more vulnerable to the dangers of a volatile market.
According to Rehm, you will always be vulnerable to interest rate fluctuations: “the duration of the fixing is so much short than the maturity of the loan.”
Investment in real estate was seen as “as safe as houses” during the epidemic, which led to a surge in home prices. According to Rehm, inflation, lending restraints, and rising interest rates have reduced that money to a trickle, citing the New Zealand market as an extreme example.
According to Rehm, negative equity is the “kiss of death” for a homeowner. Still, owner-occupants are less likely to sell in the current market than investors who may own many properties.
As one expert put it, “it is very bad for first-time homeowners because they lose the equity they have been building for all these years, and in many cases, it is their parents on the hook too, so it is a multigenerational worry.”
However, according to Brad Olsen, an economist at Infometrics, the “greater difficulty… was people’s capacity to make repayments,” even while the possibility of negative equity was alarming for certain households.
According to the assessment of the economy’s stability, over half (46%) of all buyers from last year would have to spend half of their income on mortgages if interest rates were at 7%.
This poses genuine dangers and worries for those families because “there are going to be some folks who haven’t been service tested, and that aren’t necessarily acceptable for those loans anymore,” Olsen said.
