The Reserve Bank is conceding that about 25% of the country's outstanding mortgages by value were stress tested by banks at lower interest rates than are currently prevailing.
RBNZ officials, including Governor Adrian Orr and Deputy Governor and head of financial stability Christian Hawkesby faced probing questions on the RBNZ's latest Financial Stability Report before Parliament's Finance & Expenditure select committee on Thursday.
In that latest report the RBNZ had disclosed that around 25% of the current outstanding mortgage stock in the country had been taken out in the period between late 2020 and late 2021 when house prices were high and interest rates low. As of March 2023, RBNZ figures indicate that there was $347 billion outstanding in mortgages in this country. So quarter of that would represent a touch under $87 billion.
National's Finance Spokesperson Nicola Willis said she was “very worried about the financial situation of a large number of New Zealanders".
"...Am I right that about 25% of mortgage lending hasn’t actually been tested at rates as high as they are now?”
Hawkesby replied that he was confident about the resilience of the financial system and confident about resilience of the household sector.
“We are conscious that there are pockets of borrowers who are more exposed than others.”
National MP Simon Watts pushed further and asked whether Hawkesby could confirm that the 25% of loans stress tested in 2020-21 are now outside of their stress testing limits.
Hawkesby said: "That’s what the data shows, yes."
Willis said there was a growing number of New Zealanders, "100s of thousands" who are in debt arrears who aren’t managing - particularly those people in negative equity “who did actually what the Reserve Bank was telling them to do in 2020-21 and went and borrowed at low interest rates and kept the economy stimulated and now they are in negative equity, may need to make a distressed house sale, are in significant financial distress".
"So do you think it is fair to say that the decision to stimulate the economy as hard as the Reserve Bank did has led to financial distress for a group of New Zealanders?"
Hawkesby said the RBNZ "stand by the measures we took in 2020. It was an extraordinary time.
“Through that time it was really about cashflow and confidence to cushion the blow from an unprecedented global pandemic...”
Later Hawkesby clarified about the tests that banks do and said these "have a buffer". Because a rate begins to exceed what the customer was tested at this doesn’t mean they can’t service mortgage. What will happen will be that there will be a shift in spending patterns.
Willis responded: “But at the same time, the data shows us that more people are going into mortgage arrears, that more people are going into other debt arrears - because we know that the last thing to go is the mortgage. People will not pay their credit card, they will not pay their rates. The mortgage is the last to go.”
She noted comments made by the RBNZ in its Financial Stability Report that cashflow pressures are growing and the 'buffers' are likely to be tested.
“Aren’t we in the worst scenario possible here? We’ve still got a roaring cost of living, with high inflation - eating away at the buffers - we’ve also got a significant amount of borrowing in the economy that is now having to accept a much higher interest rate than banks ever tested for.
"Doesn’t that mean that there is a real squeeze on, yes, a small group of New Zealanders and yes, it may not completely threaten the stability of the banking sector, but there is a real squeeze on a significant portion of people who borrowed big during the covid time?”
In response Hawkesby mentioned the current strength of the labour market as a key factor underpinning the ability of mortgage customers to cope.
Willis: "So, what happens if that [labour market] comes under pressure? Which every economist says it’s going to in the next few months? Are we in for a really dark winter?”
At this point Governor Orr responded: "What you are talking through is what we would expect to see in the way in which monetary policy tightens spending behaviour.
"Spending eases and then interest rates can decline. Likewise borrowing eases. So what you’ve explained is really the natural feed through of tighter monetary policy impacting on spending decisions and behaviours and then that itself easing inflation pressure.
“So what we are seeing is what we are hoping to observe - which is less spending to better match the supply capacity, inflation pressures easing and the economy working its way through the current environment.
“So, I would characterise it as business as usual with monetary policy - except with a background of a very resilient financial system and remarkably low unemployment historically."
He then clarified on "stress testing areas".
"I think it’s important to note - the word stress is used - but that is an indicator on when households need to think about other adjustments to their spending behaviour. It’s not a point around when you have to hand the keys back to the house.
“Banks don’t want the houses back, they just want to know that customers can manage and work through alternative decisions, some of which we believe through monetary policy will be less domestic spending. Which is what we need to see."
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