House prices have fallen and interest rates are rising again - but why aren't more New Zealanders getting into home loan trouble?
By Susan Edmunds of rnz.co.nz
Data from Cotality shows that in the second quarter of this year, there were 111 mortgagee sales. That is up from 74 in the prior three months, and a low of just seven in the first quarter of 2022.
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But it is still well down on the 763 and 758 recorded in mid-2009.
Credit rating and research firm Moody's put out a report earlier this month noting the rise in interest rates and drop in economic growth had weakened the housing market.
But its analysts said that was not likely to lead to widespread stress or loan problems.
The system-wide non-performing home loan ratio was up from a cyclical low of 0.2%, but still only about 0.6%.
Household debt had dropped from about 175% of income in 2021 to the mid-160% range.
Bank mortgage losses were negligible.
Frank Mirenzi, vice president of ratings at Moody's said people sometimes had a misconception that falling house prices meant defaults.
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"That's not what drives people's ability to repay their mortgage, what really drives their ability is having the income.
"The reason why things have been fairly stable is that even though unemployment has risen a bit, people's income have remained relatively stable. They've been able to continue to afford the mortgage even at those higher interest rates."
He said rates might rise further and wages had increased less than inflation, but it was unlikely to mean a big shift in the number of people who could not pay their home loans.
"If you look at where people got into trouble it was that period where the official cash rate went from 0.25% all the way up to 5.5%... even if interest rates start rising, yes it will put more pressure on households but it's not likely to result in a large increase in non-performing loans.
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"Even where non-performing loans are 0.6% of total housing loans, that's a really extremely low number.
"So from a banking sector perspective, it's starting from a really good point."
He said banks had learned lessons from the past and tightened their criteria, which helped avoid some of the difficulties experienced around the time of the global financial crisis.
"Things like loan-to-value restrictions or debt-to-income limits that regulators have placed on the sector, it carves out that riskier form of lending."
He said debt-to-income ratios were particularly effective.
"Those guardrails are really useful because what gets people into trouble is when they over-leverage, they borrow too much money and they have a high level of debt relative to income.
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"Then either interest rates go up or they have an income shock... and it's difficult for them to repay the mortgage.
"[Those limits] stop lots of lending to households with people who would get into trouble if those things occurred.
"If you look at where it's been for the last two or three years, those riskier forms of lending have been somewhere around 1% or 1.5% of new lending by banks. It's very low and well below the limit.
"As long as employment conditions hold up, even if interest rates rise, then we're not likely to see a massive spike in mortgage holders finding it difficult to pay their mortgage."
Kelvin Davidson, chief economist at Cotality, said debt-to-income ratios were not much of a factor yet but the Credit Contracts and Consumer Finance Act had stopped some borrowers for a while.
"Most importantly there's the internal serviceability testing by the banks, which has probably weeded out some 'risky' loans before they even got out of the starting blocks."
He said there had been a change of attitude over time.
"Arrears and then potentially mortgagee sales don't benefit anyone, not the bank or the borrower, so we've seen a willingness to go interest-only or extend the term or even stop repayments for a period of time."
Squirrel chief executive David Cunningham said it was not in banks' interests to pursue mortgagee sales.
"The last thing they want to do is sell people up ...it's bad publicity ...secondly, they really do want to do what's best for the customer, which is generally find a way to work it out, you know, by changing payments or extending terms or things like that.
"You've got a really, really low appetite for banks to undertake mortgage sales."
He said it was mostly property developments that went to mortgagee sales.
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"It generally is where the borrower simply won't face into it and pretends it's not happening, which is sort of unusual....generally you do all you can to find a way out, we'll work really, really aggressively with customers, sometimes it means lending them more money so they can finish a project, for example."
He said most people who bought houses at the peak of the market were able to "grit their teeth" and carry on paying off their loans even if the value of their house had fallen.
The most recent update from Centrix showed residential mortgage arrears at 1.27%, the lowest level since 2023.
There were 20,700 mortgage accounts reported as past due.
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