Financial pain ahead, economist warns
Financial stress measures and arrears have increased marginally but remain low, comments and data published by the Reserve Bank of New Zealand has revealed.
The last 16 months have seen rapid policy tightening from the RBNZ. The official cash rate has risen from a record low 0.25% to 4.75% and is due to be reviewed on Wednesday, April 5.
In February, the central bank acknowledged the need for households to reduce their spending, particularly those with higher levels of debt compared to income.
Ahead of the RBNZ April decision, an independent economist is expecting the cost of living – particularly food and higher interest rates – to cause more financial pain.
Centrix February data shows the number of households behind on their mortgage payments has reached the highest point since April 2020, with about 18,400 mortgage accounts past due.
Sense Partners economist Shamubeel Eaqub (pictured above) told NZ Adviser that he expected borrowers and households to experience increased financial stress this year.
Recent extreme weather events would also tip some households into financial hardship, he said.
“The cost of living, particularly food and high interest rates, will cause much more pain, especially as people roll off previously cheap fixed mortgages,” Eaqub said.
Financial stress measures considered low
In its February monetary policy statement (MPS), the RBNZ discussed the resilience of household balance sheets amid rising interest rates and the outlook for reduced labour demand.
It acknowledged the potential for interest rate rises to have a bigger impact in cases where debt levels are higher.
“However, it was noted that while measures of financial stress have increased marginally, they remain low,” the RBNZ said in the February MPS.
The central bank agreed that households would need to make careful spending decisions as debt servicing costs rise. Recent homebuyers with a high debt servicing commitment relative to their income (high DTI ratio), would experience spending constraints the most, it said.
Mortgage arrears on the rise
According to RBNZ data, non-performing loans for housing, a key indicator of mortgage stress, were 0.3% in January 2023, up from 0.2% in January 2022. Non-performing loans for business were down year-on-year from 0.6% in January 2022, to 0.4% in January 2023.
RBNZ data showed housing loans 90 days past due but not impaired reached $859m in January, up 13% from $755m in December, increasing 21% year-on-year.
A February Credit Indicator report, released by credit bureau Centrix on March 1, showed that the number of mortgage accounts past due was up 22% year-on-year.
Centrix noted the increase could be attributed to Kiwi households rolling off fixed home loans and onto higher interest rates.
In the February MPS, the Reserve Bank said that to-date, the share of mortgages for which scheduled payments had fallen behind remained “very low”, noting that household incomes had also increased over this time.
“However, this share is expected to increase as the economy contracts and employment declines from very high levels,” the RBNZ said.
Eaqub said that the cost of living, combined with borrowers refixing to significantly higher interest rates, was driving an increase in arrears.
In many household budgets, there is “little buffer left”, he said.
“Around 600,000 households in New Zealand are poor: they don’t have enough or have just enough income, meaning they are one shock away from financial disaster,” Eaqub said.
Eaqub said it was most important to “get help early”, suggesting that financially stressed households “make a credible plan”.
“For most, a financial adviser, mortgage broker and even [the] bank are good places to seek help,” he said.
The wholesale cash rate is due to be reviewed again on Wednesday, with ANZ one of the banks forecasting a 0.25% rise in both April and May.
