Mortgage monster swallows Kiwi households

CoreLogic’s latest housing affordability report shows that the percentage of Kiwi household income required to service a 25-year, 80% loan-to-value ratio mortgage has risen to 53%, up from 50% three months ago and the long-run average of 37%:

“Compared to the long-run average of 37%, the latest reading is still the most problematic area of affordability and surpasses the sustained 50% peak we hit in 2007-08”…

“The falls in property values that we’ve seen in recent months will have helped the required debt servicing costs for households (given smaller mortgages), but this effect has been outweighed by the rise in mortgage rates themselves.”

As shown above, the mortgage repayment burden is highest in Tauranga (71%) and Auckland (60%).

Mortgage serviceability is likely to remain stretched given the Reserve Bank of New Zealand (RBNZ) has lifted its official cash rate forecast above 4% by the middle of next year, with rate cuts not likely until late 2024:

RBNZ: Official cash rates to peak above 4%.

The above data only applies to homebuyers taking out new mortgages. However, existing mortgage holders in New Zealand will soon also experience a sharp lift in repayments.

Unlike Australia, the bulk of Kiwis are on fixed rate mortgages of two years or less. This means that most Kiwis that originated mortgages at rock-bottom pandemic rates have yet to impacted by the RBNZ’s aggressive rate hikes.

Towards the end of this year, when these fixed rate mortgage terms start to expire, many Kiwi borrowers will be forced to refinance to significantly higher (perhaps double) mortgage rates.

That is when the impact of the RBNZ’s aggressive monetary tightening will truly be felt by Kiwi households. Many will also likely be plunged into negative equity on the back of heavy house price falls.