Latest Reserve Bank figures show non-performing housing loans rose nearly 12% in May, climbing to levels last seen around eight years ago

Mortgage arrears are now climbing quickly and approaching levels last seen about eight years ago.

New figures released by the Reserve Bank for the month of May 2023 show that non-performing housing loans rose by $131 million (nearly 12%) in the month to reach $1.236 billion. 

That's now a higher non-performing loan figure than was seen at the peak of the sharp but brief rise in 2020 at the start of the pandemic. The RBNZ has previously indicated it expects to see more borrowers falling behind with their payments this year. 

The non-performing loans are starting from a very low base - that needs to be stressed. But they are rising quickly, having jumped 45.5% since the start of 2023.

As of the end of May the total outstanding stock of bank mortgages was a little over $343 billion.

The RBNZ data shows that the non-performing loans make up just 0.4% of the total bank mortgage stock - but that's up from 0.3% in April and up from 0.2% as of November last year.

Detailed loan information as per the current data series has been published by the RBNZ since only 2018. However, a longer run series that gives the percentages of non-performing loans to the total shows that the current 0.4% figure was matched during 2020. But numerically, the peak of the pandemic surge was just under $1.2 billion of non-performing loans in July 2020.

So, the May 2023 figure exceeded that. And in terms of percentages of loan money that's not performing, the previous time we saw figures of 0.4% or higher was back in 2015 when the figures were still coming down after the stress of the Global Financial Crisis in 2008. The non-performing loan percentage figure actually peaked at some 1.2% in 2009 and hovered around at about that level till mid-20011.

We can say, therefore, that at the moment non-performing loans are running at levels last seen in 2015 - eight years ago.

In terms of the detail of the May 2023 figures, loans that have officially been described as 'impaired' rose $13 million - nearly 10% - to $148 million. Impaired loans are up some 56% so far this year.

During the pandemic (in August 2020) the impaired loans figure reached $149 million.

In terms of mortgages that are 90 days past due but not impaired, this figure rose by $117 million (12%) in May to $1.087 billion. That figure's up 44% since December 2022.

The pandemic peak for 90 days past due mortgages was $1.044 billion in July 2020.

It will be of vital interest to observe what happens with these figures in coming months. Substantial numbers of mortgage customers have still yet to roll over from reasonably favourable interest rates to the much higher rates now prevailing.

For example, the low point of the historically low interest rate cycle we saw was May-June 2021. If someone took out a two-year fixed mortgage rate in July 2021, they might have been able to get a rate of about 2.8%, according to RBNZ figures. Assuming these people were to take out another two-year term when re-fixing this month, they might end up paying nearly 7%. 

In its six-monthly Financial Stability Report issued at the start of May 2023, the RBNZ said that debt servicing costs "have risen significantly from historically low levels during the pandemic".

"For a household with a mortgage, the share of disposable income required to service the interest component of their mortgage debt will more than double from its recent low of 9% to around 22% by the end of this year," the RBNZ said.

The central bank said that despite the significant rise, "this would still be lower than the peak experienced in mid-2008".

"However, this increased debt servicing burden is distributed highly unevenly, with some borrowers, such as those who fixed at the low of mortgage rates in mid-2021, seeing far greater rises in their debt servicing costs than others."

When senior RBNZ staff appeared before Parliament's Finance and Expenditure Committee on May 4, 2023 to discuss that Financial Stability Report they conceded that about 25% of the country's outstanding mortgages by value were stress tested by banks at lower interest rates than are currently prevailing. 

In the Financial Stability Report, the RBNZ said that although increasing debt servicing costs alongside high inflation will constrain mortgaged households’ budgets, "we expect most borrowers will be able to continue to service their debt obligations without significant stress, given the servicing test buffers that banks have applied when assessing borrowers’ loan affordability and the current strength in the labour market".

"However, for households that borrowed during the period of very low interest rates between late 2020 and late 2021, current interest rates exceed some of the test rates used by banks during this period. Therefore, some of these borrowers and other borrowers with high debt-to-income levels may begin to struggle to meet their repayment obligations as they reprice onto the higher rates."

The report said that banks have been proactively identifying borrowers who may face debt servicing challenges as they reprice to higher interest rates.

"So far they have reported relatively low numbers of customers encountering difficulties in meeting higher repayments. In part, this reflects the fact that many borrowers used the period of lower interest rates to make excess principal repayments ahead of their original schedules. These borrowers can now use this buffer to limit the rises in their repayments due to higher interest rates.

"However, we expect more borrowers to fall behind on their payments this year, given the ongoing repricing of mortgages and expected weakening in the labour market."

So, that was the RBNZ discussing the situation in early May. Clearly as the figures for the May month demonstrate, much of what was being discussed is now materialising and we will have to see in coming months how things develop.