ASB economists see new mortgage interest rates being back over 4% in about a year's time.
And they estimate that every one percentage point increase in mortgage interest rates would add about $3.3 billion to NZ's household debt servicing costs.
However, they reckon that in the forthcoming cycle of interest rate rises, average mortgage costs are not likely to rise much above 4%, meaning the 'peak' in this cycle will be historically low.
In an Economic Note, titled: 'Prepare for Higher Interest Rates', ASB senior economist Mark Smith says the ASB economists are expecting the Reserve Bank (RBNZ) to lift the Official Cash Rate (OCR) by 25 basis points in October (to 0.50%), then November (to 0.75%) and February (to 1.0%), with the OCR ending 2022 at 1.50%.
ASB is the country's second biggest home lender with $67.7 billion worth of residential mortgage lending exposure as of June 30.
ASB expects new carded mortgage interest rates to rise 10-50bps across the curve before the end of the year and a total of 30-125bps by late 2022.
"We expect these increases to come through in a number of steps (particularly for short-term rates) rather than one big jump," Smith says.
"By late 2022, these increases would take new carded rates broadly back to where they were in late 2019."
He notes that due to mortgage fixing, borrowers will be "temporarily shielded" from the increase in mortgage rates.
However: "This shield is not particularly large, with close to 80% of mortgage debt due to roll over in the next 12 months (average duration roughly 10 months)."
So, assuming household borrowing habits don’t change, ASB forecasts have average mortgage interest rates climbing by roughly 35bps by the end of the year (50bp of OCR hikes). T
"The average rate faced by mortgage borrowers at the end of this year would still be very low (around 3.30%), about 75-80bps below early 2020 levels. The average effective mortgage interest rate is then expected to climb a further 65bps or so over 2022 (to roughly 3.90%), slightly above the 50bps of OCR hikes we expect over 2022.
"Although we don’t expect OCR hikes over 2023, our estimates suggest the average effective mortgage rate will rise a further 30bps or so over 2023 to around 4.20%. Our rough forecasts are broadly consistent with recent RBNZ research showing impacts will take time to accrue."
All up, ASB is expect average mortgage interest rates to rise roughly 130bps from now until the end of 2023, taking them back to late 2019 levels.
"The higher debt servicing costs should be manageable for most households, but those with large debt exposures would feel the cashflow hit.
"...For borrowers, we reiterate our earlier messages that it would be prudent to budget and prepare for higher future debt servicing costs."
Smith says latest RBNZ figures (from July) suggest the actual average borrowing interest rate paid by mortgage holders was at that stage, 2.9%, a record low.
"Our estimates suggest that on a net basis every 1 percentage point increase in customer interest rates would reduce household cashflows by roughly $2.6 billion, roughly 1% of disposable incomes.
"Every 1 percentage point lift in mortgage interest rates would raise household debt servicing costs by around $3.3 billion per annum. However, a 1 percentage point increase in term deposit interest rates (assuming a 17.5% marginal tax rate) would likely deliver an additional after-tax cash flow of $675 million per annum."
Smith says household debt servicing cost "look to be manageable" and households in aggregate should have a reasonable buffer to cope with modestly higher mortgage interest rates.
"Moreover, many households have maintained their debt repayments at a time of falling mortgage rates, paying off additional principal and building up a larger buffer. RBNZ figures suggest that since the end of 2019, mortgage holders made more than $22bn in excess repayments. Household could choose to lengthen the duration of their lending when borrowing rates climb, smoothing through the impact."
Smith says that higher mortgage interest rates should, however, "sharply" slow housing market momentum, with prices largely expected to flatline over 2022.
But in terms of economic activity - the gradual pace of OCR hikes envisaged is unlikely to derail the economic expansion "and so shouldn’t significantly weigh on household incomes and employment".
22 Comments
Looking at commodities, energy, logistics, worker shortages etc. globally I think we might be entering a higher inflation environment. China closing steel mills and aluminium smelters will not be transitory. The move away from fossil fuels will not be transitory. Dekographics probably won't be transitory.
Shipping might be transitory but it will still take a couple of years to launch enough new ships.
ASB economists see new mortgage interest rates being back over 4% in about a year's time, but this is based on very conservative and optimistic assumptions that the OCR peak will stop at 1.5%, that inflation is only a transitory phenomenon that will quickly abate, and that the RBNZ will be able to action only very gradual and slow increases.
I personally think it is much more realistic to assume that mortgage rates will be, in 9 months time, over 4.5%, and that the OCR will be around 2.00%.
Just yesterday RBNZ said any rate rises would be gradual.
I think they’re probably pretty close to the mark here - even if I suspect the timing of this release is designed to fuel the FOMO just a little bit longer.
The devil is in the detail though. If their prediction addressed interest rates in three years’ time i think it would be a very different narrative.
My prediction is interest rates will peak in 2-3 years before collapsing under it’s own weight; back to somewhere near what we’re at now.
Fortunr - inclined to agree as rates are not set by OCR but by global markets so inflation elsewhere will be a key factor. The US CPI is 5% but a more reliable index based on manufacturing costs says 8%, whichever is right interest costs will increase and that reduction in discretionery spending will have a knock on effect, question is where/when/how much and unfortunately my crystal ball has malfunctioned due to an upgrade from - you know who!
That million-dollar mortgage on a lousy shoebox townhouse in some godforsaken suburb of not-Auckland (ie: Silverdale) is going to start being a real problem when it's costing $40,000 and upwards worth of after-tax income just to keep up with the interest portion of the loan.
I can see a lot of serious questions about poor life choices coming up.
The price of everything used daily is going up food gas power, if inflation keeps going up government would have no choice but to raise interest rates. If rates goes up any higher than 4% at what point would average household go under. Like you said $40000 a year without paying principal. This is so sad if a couple are on Auckland average wages of around $140000 before tax this does not give much room to live let alone pay principal of the million dollar mortgage. This situation is crazy you have to wonder how this has happened
The whole world is going to the dogs, you would be mad to have kids these days. We will be very lucky to made it to 2050 if our current trajectory is maintained. Population increase as the resources diminish and nobody even wants to talk about the hard decisions let alone do anything. Sorry to be negative but we are living in a dream world.
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