Households will face rising interest rates when they re-fix their mortgages over the next two years
New Zealand households have amassed “enormous amounts of debt” and will face higher rates when they re-fix their mortgages over the next couple of years, according to Moody’s economists.
Read more: Exposed: The interest rates banks use to stress test mortgage applicants
In a recent webinar, Moody’s analytics senior economist Katrina Ell said some 88% of New Zealand mortgages were on fixed interest rates and would need to be re-fixed within the next two years as interest rates rise.
“Households have actually accumulated enormous amounts of debt during the past couple of years,” and that there will be “a big cohort of mortgage holders in New Zealand exposed to those higher lending rates that are coming quite aggressively from the RBNZ,” Ell told Stuff.
Surging house prices have been in retreat since RBNZ started to lift interest rates from a record low in October. The central bank has hiked the benchmark rate by 125 basis points to 1.5% to curtail inflation, which hit a 30-year-high.
Read next: RBNZ's biggest hike in 22 years sounds inflation warning
“It is very clear that the housing market has passed its peak, and we will see ongoing cooling,” Ell said as she noted that the “wealth effect” of declining house prices would be an important headwind for consumers to contend with over the next year, Stuff reported.
Ell said it was important to monitor consumer sentiment closely, as she expected consumers to face increasing pressure from higher costs, causing them to pull back on spending.
“It's really worth keeping a close eye on this sentiment data just to see how consumers are responding to higher borrowing costs,” Ell said.
In RBNZ’s latest Financial Stability Report, the bank said recent borrowers are most exposed to rising interest rates and declining house prices, as a larger correction in the property market remains a possibility, Stuff reported.
“While a gradual decline in house prices to more sustainable levels is desirable from a financial stability perspective, a sharp correction remains a plausible outcome that would have broad economic implications,” the report said.
Particularly vulnerable to house price declines were recent buyers with limited equity. A large fall in house prices, meanwhile, would significantly reduce housing wealth and could result in a contraction in consumer spending, it said.
“Some recent mortgage borrowers could face difficulty servicing their debts as interest rates rise alongside higher living costs,” the report said.
Moody’s doesn’t expect inflation to return to the Reserve Bank’s target band of 1 to 3% until early 2024, Stuff reported.
