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The ‘mortgage earthquake’ erupts in the shadow of New Zealand’s housing market


Over the past year, both fixed and variable mortgage rates in New Zealand have risen sharply, as shown in the following graph:

Mortgage rates in New Zealand are on the rise.

At the end of March 2022, New Zealand’s floating mortgage rates were up about 0.6% from their June 2021 lows, while the 3-year and 5-year fixed mortgage rates were up about 1.9% from their lows.

David Hargreaves of now believes that a “mortgage earthquake” is about to explode in the New Zealand housing market, as households face “massive increases in mortgage payments”:

This would be like some kind of rolling mortgage earthquake…

Someone who took out a 30-year mortgage in May (2021) fixed for a year, and is now looking to reintroduce it, can find their monthly payments will rise exactly by a third…

In dollar terms, a person who has taken out a “medium-size” mortgage ($329,000 as of May 2021) may experience an increase in their monthly payments by $419 (more than $5,000 for a year). A “medium-size” mortgage for a first home buyer ($548,000 as of May 2021) would cost an additional $698 a month (more than $8,000 for a year)…

These examples are both based on ANZ and BNZ rates (given their “market leading” highs at the time of writing). In May 2021, both banks offered one-year “special offers” at 2.25% and both now offer 4.55%…

We inflated our housing market by 40% between the start of the pandemic in 2020 and the end of last year. And of course we have similarly inflated the volume of mortgages. Now they are huge … Now there are people who have seven numbers for mortgages …

Homeowners’ pain is likely to be shared, simply because of the huge role the home market plays in the New Zealand economy. Wherever the homeowner’s suffering goes, the economy will follow.

These larger mortgage payments will see less spending in the economy. Some people may put their homes on the market, adding to the recession that is already beginning to unfold.

Two weeks ago, the Reserve Bank of New Zealand (RBNZ) shocked New Zealand economists when it raised the official cash rate (OCR) by 0.5% to 1.5%.

The RBNZ’s February Monetary Policy Statement (MPS) also saw the OCR increase to 2.2% by the end of this year and by 3.3% by the end of 2023.

The following table highlights the impact of these actual and projected interest rate increases by comparing the monthly mortgage payments on a median New Zealand home in the lowest interest rate cycle (ie June 2021) with payments at the end of March 2022 and projected. Increases set by the Reserve Bank of New Zealand. This analysis uses floating average mortgage rates, which should rise in line with the Reserve Bank of New Zealand’s OCR forecast.

As you can see, monthly mortgage payments on an average New Zealand home have already increased by $520 between June 2021 and March 2022. The payments are expected to rise by an additional $540 by the end of 2022 and then by another $520 by the end of 2022. 2023.

Thus, if the RBNZ’s OCR projections come true, the typical New Zealand household that buys a median home would pay $1,580 more in monthly mortgage payments than the average household paid in June 2021 and $1,060 more than the average household paid in March 2022.

It is clear that the rise in monthly mortgage payments will be sharper in Auckland ($1421 a month) and Wellington ($1,190 a month) between March 2022 and the end of 2023, given that these markets are more expensive than the national average.

Regardless, New Zealand’s army of indebted households faces a severe interest rate shock, with some new buyers also facing the prospect of property devaluation as property values ​​fall below the purchase price.

Given the huge role that housing plays, the pending escalation of mortgage payments and falling property prices also threaten to dwarf New Zealand’s macro economy.

Leith van Uncellen is the chief economist at MB Fund and MB Super. He is also the chief economist and co-founder of MacroBusiness. Leith previously worked for the Australian Treasury, the Victorian Treasury and Goldman Sachs.

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