Worsening housing affordability presents an increased risk of mortgage defaults in New Zealand, according to credit rating agency Moody's Investor Services.
In a new report on covered bonds issued by NZ banks, Moody's says it expects housing affordability will remain significantly worse than the average for the last 10 years, "which is credit negative for residential mortgage covered bonds we rate in New Zealand."
The report said rising interest rates meant the mortgage payments on new mortgages taken out in August this year would eat up an average of 39.1% of average household income, up from 35.4% a year earlier.
In Auckland, new borrowers required an average of 47.1% of average household income to meet their mortgage payments.
"In every region, the share of household income to meet mortgage repayments was worse than the region's average for the past 10 years," the report said.
"Rising interest rates, which are the main cause of poor housing affordability, will increase the risk of delinquency for outstanding loan pool mortgages."
For the NZ covered bonds we rate, which the country's five largest banks issue, most outstanding mortgages are fixed rate loans.
"However, the fixed terms for 70% to 80% of these mortgages will end in the next two years.
"When fixed terms end, borrowers will have to fix their loans for a further period or switch to floating rate mortgages.
"Either way, interest rates will be higher than current rates for outstanding mortgages."
The report said Auckland's poor housing affordability was a particular risk for NZ covered bonds because 46.1% of cover pool mortgages were for properties located in the city.
A breakdown of the cover pool mortgages by the five major banks showed that ASB was the most exposed to the Auckland market at 58%, followed by ANZ 47%, BNZ 43%, Westpac 40% and Kiwibank 39%.
Moody's said it expects interest rates to keep rising this year, however their effect on housing affordability and the risk of mortgage defaults would be mitigated by falling house prices.
"We expect New Zealand house prices will continue to decline over the rest of this year and into 2023 as rising interest rates and high inflation weigh on property market sentiment," the report said.
"House price declines will likely offset rising interest rates," it said.
Covered bonds are debt securities through which the bondholders have both an unsecured claim over the issuing bank and hold a secured interest over a specific pool of assets set aside by the issuing bank known as the cover pool. NZ banks' cover pools consist of residential mortgages. if the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders.
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35 Comments
"House price declines will likely offset rising interest rates,"
By that logic they're predicting NZ house prices will fall by 50% ??
If you use the cash flow / discount rate formula to determine the asset price (P = CF / r ) and assume the average pre-tax rental income from a property is $500 a week, which is $26,000 annually.
If you discount an annual rental income of $26,000 by a mortgage rate of 3% it gives an asset price of $866,666 (close to where we found ourselves last year).
If you discount an annual rental income of $26,000 by a mortgage rate of 6% it gives an asset price of $433,333.
So unless the cashflow for the property doubles, then rising rates to 6% could in theory half the asset price.
Obviously not a perfect science, but gives an indication of the impact of rising costs of capital on asset prices - especially when the cost of capital doubles, but the cash flow only rises by a fraction of that.
Yep, and if rents were hypothetically to rise by 100%, interest rates would have to be jacked much higher again to offset the huge inflation impact. Long story short, property is stuffed for another 5 years
From a valuation perspective you are 100% correct. As rates go below 5% the leveraged increase in price is almost logarithmic. The difference between 8% and 9% rate is much less startling by comparison. This applies in either direction.
Cheap debt drives speculation. Time for the banks to actually do their jobs or have the rating agencies downgrade them due to the risk their books.
Your calculation was based on assumptions:
A, one would borrow the entire amount, or 100% LVR
B, Rent sits still and no change.
C, Interest Rate offering is what owners actually paying.
Falling house prices have no effect on ability to service mortgage debt and higher rates reduce the discretionery spending so expect the flow on effects to emerge.
Moody's is about as neutral an opinion as we're going to get on the subject of house price trajectory.
I'm looking forward to some innovative spin from TTP on this piece.
Yes these guys have no vested interest such as radio advertising income lol. An honest straight talking report.
Yep, rating agencies are as solid as jelly. "Hundreds of billions of dollars' worth of these triple-A securities were downgraded to "junk" status by 2010 and the writedowns and losses came to over half a trillion dollars." https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
I'm looking forward to some innovative spin from TTP on this piece.
Where is TTP??? I'm sure there are many that threw the kitchen sink at the property market upon his 'expert advice' of a "soft landing", they will need guidance now more than ever (sarc).
the risk of mortgage defaults would be mitigated by falling house prices.
Huh….?
The caveat for the sentence is likely.... *for those who didn't over extend themselves at the peak of the market, when rates were at a record low.
still, the sentence doesn't make sense, it implies that the more house prices fall, the less risk of mortgage default
Yes agree its quite misleading.
I think they meant if you were to purchase later in 23
yes that's what they mean but it's nonsense, mortgage default risk is not for those who will buy in the future at interest test rates of … 8 - 9%, mortgage default is clearly a risk to those who have already bought, especially the few that bought in 2021, for them falling house prices is NOT going to help to avoid mortgage default, quite the opposite!
Apparently Moody's report does say, "Worsening housing affordability presents an increased risk of mortgage defaults in New Zealand." So while stating the obvious, it's pleasing to see it wasn't all written at ten to five on a Friday.
I didn't find that misleading or contradictory at all.
If you took out a mortgage at 6% on a property valued at 1.3 million, you are far more likely to default than someone who takes out a mortgage at 6% on a property worth 650k. All other things being equal.
They are saying falling property prices lowers the risk of future defaults.
You are only looking at it from the current/historical perspective, of people who paid too much and are subject to increasing rates.
As the banks have stated, defaults are not currently an issue, unless employment decreases.
Default is not caused just by decreasing property prices, it is caused by property bubbles, people paying too much. and increasing interest rates.
Maybe they mean - as house prices decline there'll be an army of FHBs chomping at the bit to snap up bargains in the crashing market. The articles about covered bonds linked to mortgage loans. The concern isn't really about new home owners. If a bunch of home owners make a 500K loss then it's a sleepy yawn fest in the finance world. If a bank loses 50 cent of equity then it's code whero panic stations.
For future buyers, not previous ones
The residential mortgage-backed securities which banks have been offloading onto the RBNZ as collateral for cheap FLP money won't be worth the paper they're written on before too long either. Moody's will be well aware of this, they learned their lessons during the GFC. As usual, it'll be the taxpayer left holding the empty bag.
How could average wage earners get a mortgage in August this year, most a bank would lend a average wage earner is around 300k that’s 5 x income.
Most households earn significantly more than the average wage, like more than double.
If one person is wanting to buy themselves a home, they probably want to look at something like an apartment.
I get what you’re saying but that doesn’t make sense. The median household income is lower than the average, by a good 10-15k.
That would suggest most households earn less than the average household income, which is also less than double the average individual income.
Neither statistic caters for those who already own a home, nor those who have no intention to buy ever. Both groups likely skew the stats down.
Looking at a control group of potential buyers wages would make this a lot easier, potentially a good metric would be to focus on 30-40yo salaries, as they are most likely to have a deposit together and be purchase ready.
But I’m saying that I believe fear may keep buyers out, and debt to a low once the stories of lost equity feed out into the general public. Have heard a few now out in the real world, bought at the peak and the bank won’t renew the mortgage. I don’t think these are technically mortgagee sales as they can still afford to make payments however the bank have said no for other reasons.
One lesson learnt by Central Bank on Ireland following their crash was need to limit bank lending to a sensible multiple of borrowers’ income. So the limit is set at 3.5x. Repayments become unaffordable at 5x when long term average interest rates return, which they will
Implementing DTI's would require a level of wisdom that comes from learning the lessons of others mistakes.
Ending up with house prices 10x income is the result of being governed by weak minded and unprincipled individuals (and political parties) who have succumbed to being swayed in their judgement by the irrationality of the beliefs of the herd.
In essence, we've acted like fools (across the anglosphere) and at some point, there will be a painful cost to that leadership/governance.
"You will own nothing, but you will be happy," as they say in WEF wonderland.
What a load of cobblers, TTP assures me we've already landed softly.
Wylie E Coyote always treaded air, before he began the plummet into the canyon.
Now he is beginning his descent, into the abyss.
Then he will hit the ground hard.
Before a 50 tonne lump of granite buries him.
Quality TV that was. Unlike the Road Runner, specuvestors will not be able to outrun the freight train of debt. The next 24 months will be time for...
Popcorn.
Yes, it was always an era of prescience, as Hollywood knew what would happen with neoliberalism, as it is so tied to the government.
But Peter Carey was the best of them all. Read his short stories from 50 years ago you see it all.
I like literature, but know little of Carey’s works. Could you please briefly expand on the central themes of the short stories you mention?
You'll know the insanity is over when real estate isn't a daily central theme of news reporting. Long, long way from here.
DGM = Doom and Gloom Moody's.
Are we in a recession yet? (asking for a friend)
https://www.reuters.com/world/americas/hot-core-canada-may-need-recessi…
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