Data suggests some households are “quite sensitive” to the risk of rising costs
ASB has reported “increased concern” around the potential impact of higher mortgage rates on New Zealand households, and noted that a higher post-COVID debt load could mean the economy is “much more sensitive” to interest rate rises.
Senior economist Mike Jones said that while most households could cope with higher interest rates relatively easily, recent first-home buyers would be the most vulnerable to sharp rate hikes. With 77% of mortgage debt on fixed-rate terms for less than a year, he noted that the market is also carrying a significant amount of re-set risk.
“There is no such thing as the ‘average borrower’, and new entrants into the housing market are more at risk from higher mortgage rates,” Jones said.
Read more: Mortgage advisers report dramatic decrease in investor activity
“They typically have lower levels of equity, and may not have budgeted for the risk that the ‘old days’ return and interest rates finally go up instead of down.”
“Data on mortgage fixing suggests that households are quite sensitive to the risk of mortgage rate rises over the coming months,” he explained.
“The boom in mortgage lending post-COVID has been mostly for relatively short fixed-rate terms. The average duration of outstanding mortgage debt has fallen to around nine and a half months, and a full 77% of all mortgage debt is due to reset to new terms over the coming year.
Read more: House price value growth plummets across main centres - QV
“On an aggregate level, there seems to be plenty of buffer to accommodate higher mortgage rates - but macro-level data also averages out the extremes.”
When it comes to house prices, Jones said that a rise in rates should slow the rate of growth, as the rapidly dropping rates have been one of the key contributing factors to the price boom over the past several years.
“A slow upward grind in mortgage rates over the next few years should, in the least, slow the rate of house price inflation,” Jones said.
“Falling interest rates have been one of the key drivers of the price boom we’ve seen over the past 18 months, so we expect this tailwind to soon flip into a light headwind, joining the likes of rising housing supply, tighter credit conditions and reduced investor enthusiasm for housing.”
