The financial squeeze on people with mortgages is set to tighten, and the pain is set to hit those who bought houses at the peak the hardest.
The Reserve Bank has released its six-monthly Financial Stability Report, reiterating that New Zealand households and businesses are facing higher debt servicing costs.
Around two-thirds of mortgage debt that was fixed at those sparkling low interest rates at the start of the pandemic have now rolled over to higher rates.
The average rate is expected to reach 6.4% by mid-2024, from its low point of 2.9% in late 2021.
Businesses are already facing a large increase in servicing costs, because they tend to fix for shorter periods. And it’s predicted to get worse, according to the central bank.
The average share of disposable income going on interest payments is expected to rise from a low of 9% in 2021 to around 18% by the middle of next year.
That’s below other times of high economic stress such as in the global financial crisis, but it’s likely to be felt strongly by some borrowers.
People who borrowed to buy houses at high levels in 2020 and 2021, when the market was at its peak and interest rates were at rock bottom, will bear the brunt of that pain.
The Reserve Bank said borrowers have been able to adapt to higher repayments by cutting discretionary spending, helped by higher wages. Some have extended the term of their loans to ease the financial stress.
But it’s warning more borrowers are likely to fall into arrears over the next year.
“If unemployment continues to increase and domestic economic activity continues to slow, some indebted households will have fewer options to avoid missing their debt repayments.”
House prices have now stabilised, the bank said, after falling an average of 15% in November 2021 and the bottoming out of the market in March this year. They’ve risen around 3% since then.
High migration is pushing prices up and pressure is likely to increase on dairy farmers, with a lower milk payout and increased costs likely to see some dairy farmers making a loss in the current season.
Global challenges
The war in the Middle East, the slowdown in the Chinese property market, and the possibility interest rates may continue to rise are the big global economic challenges, the Reserve Bank said.
The full impact of the global economy’s adjustment to higher interest rates is yet to be felt, and inflation pressures remain tight.
Challenges felt in Aotearoa are echoed around the world. It’s likely rates will remain high for some time, as countries grapple with high inflation and low unemployment.
“The economic impact of the Israel-Hamas conflict is still highly uncertain and will depend on the extent to which the conflict escalates. We are monitoring the situation and its potential impacts closely,” the review said.
“While the global economy’s adjustment to higher rates has so far been relatively benign, the full impact is yet to be seen and there are several tail risk scenarios that could eventuate that institutions and policy makers need to remain vigilant against."
Unemployment, wages up
Unemployment is continuing to rise, up a smidgen from 3.6% to 3.9%.
But wages are up too, although at a slower rate than earlier this year. Wages and salaries are up 4.3%, with public sector workers seeing the biggest increase.
Collective agreements for teachers, nurses and the defence force had driven their average pay up by 5.4% in the past year.
That’s the highest increases since Stats NZ started collating data in this form in 1992.
Private sector wages were up 4.1%, down slightly on the last quarter.
When the economy tightened, employers often cut hours before they cut jobs, and that’s showing in the growing underutilisation rate.
That rate is the number of people who work fewer hours than they’d like. That’s grown by 13,000 people in the September quarter and is highest among young adults.
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