Rising mortgage interest rates will mean many people are likely to have to set a bit more aside for mortgage payments this year, although it is far from certain how much and how quickly rates will rise.
But they have actually been rising for the last six months.
The average of the two year fixed rates charged by the major banks bottomed out at 4.41% in June last year, and then rose steadily to 4.58% in the end of last year, according to interest.co.nz’s Home Loan Affordability Report.
And there has already been a flurry of mortgage rate increases this year, so rising interest costs are already well and truly with us.
The following table compares the average two year fixed rate in December last year with those in December 2015, 2014, 2010, 2009 and 2007.
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It also shows what the fortnightly mortgage payments would be under each rate for mortgages ranging in size from $100,000 to $700,000 (assuming a 30 year term).
For a $250,000 mortgage, which is probably a fairly common amount to borrow in many regional centres, the payments at the December 2016 rate of 4.58% would be $588 a fortnight.
If interest rates go back up to where they were a year earlier at 4.78%, the mortgage payments would go up to $602.
That’s only an extra $14 a fortnight which shouldn’t cause too many problems.
But if interest rates go up to 5.97%, where they were two years previously, the mortgage payments increase by $99 a fortnight, which could start to bite people on tight budgets.
And at the extreme end of the scale at 9.34%, which is where they were in December 2007, the payments would be an extra $365 a fortnight, which would be a frighteningly high amount of extra money for most people to have to find.
For some it would probably be impossible.
Unfortunately a $250,000 mortgage won’t get you far in Auckland where the median selling price was $840,000 in December and the lower quartile price was nearly $750,000.
That makes it far more likely that someone buying in Auckland would have a mortgage of $500,000 or even $700,000.
Even for them, if interest rates rose back to 4.78% where they were in December 2015, the pain would be minimal, with payments on a $500,000 mortgage increasing by $27 a fortnight and payments on a $700,000 mortgage rising by $39 a fortnight.
But if interest rates go back to where they were two years ago at 5.97%, things start to become more difficult, with the payments on a $500,000 mortgage increasing by $198 a fortnight and the payments on a $700,000 mortgage increasing by $277 a fortnight.
Having to find an extra $100 a week or more is likely to put most household budgets under some sort of strain and that will get worse the more that interest rates rise.
Going back 10-20 years when most mortgages had a 20 year term, people who found themselves financially stressed could consider increasing the term of their mortgage to help keep payments manageable.
But the explosion in house prices that’s occurred over the last few years, particularly in Auckland, has seen a shift to 30 year mortgages.
That means people who have borrowed as much as they could afford to repay while interest rates were at or near recent lows are more likely to find themselves in financial difficulties if interest rates rise significantly.
Without the option of extending the term of their mortgage to keep payments manageable they face an increased risk of defaulting on their mortgage or having to sell their property to reduce debt.
And if the rise in interest rates is accompanied by a fall in house prices, it will compound their problems and also increase the risk that the banks may not get back all of the money they loaned against the properties.
The possibility of such a scenario, however unlikely it may appear at the moment, is probably one of the reasons the Reserve Bank wants to be able to introduce debt-to-income ratio restrictions on new mortgage lending.
Such restrictions would not help those people who are already loaded up with debt, but they might reduce the size of the debt millstone that future generations take on as they climb the property ladder and the risks that go with it.
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97 Comments
I've been saying for a while these low interest rates have been a good time to pay down mortgage debt, and that's still the case. Time for people split mortgages across fixed terms. Review repayments and look at switching from interest only or 30 year terms to 15, 20 or 25 terms.
The market thinks interest rates still have a 1% increase left this year. If the market is right interest costs are going to get expensive again.
30 year terms are more common these days. At 10% that would be about $1100 per week. You would need to be in the top 10% of income earners and eat rice and beans to survive.
In 2007 total private debt was paying $28b in interest per year. It would only take a weighted interest rate of 6.52% to reach the same interest payments with the private debt figures from November. Our financial system would most likely cave-in prior to reaching 9-10% interest.
$1100 a week for 30 years! OMG! It depends on how quickly it reached the 10% level as to how viable the banks would be. But even if banks went bust, the debt would still be owing to some entity and the mortgage rate would not change. So there is no "out" at all. In 1990 my mortgage was 15.4%. So 10% may not be conservative. Who knows if inflation will really start cranking.
I didn't realize that interest rates were as high as nearly 10% just 10 years ago. I think if they went up to that within the next few years at least, we will be having a lot of mortgagee sales, of houses purchased by people who have purchased overpriced houses in Auckland over the last few years. But if that happened, I can't see too many people buying houses at anywhere near the price that they are now. It will become supply and demand too, so the supply will increase, meaning more options for people to buy. If Labour/greens get in with NZ first, in the next election, I can see them reducing immigration numbers, which will only reduce demand. Potentially worrying times for many with the rising rates. I couldn't sleep at night if I knew I had a half million dollar mortgage to service.
The figures above also assume that prices on other things won't increase. But potentially we could be in for more inflation if borrowing costs increase.
You say you " cant see too many people buying houses at these prices " ............ well you dont , normally see such idiocy , but itf you are laundering money , you probably dont care too much about the price you pay , so long as you can legitimize the money and have it in a secure tangible asset you will pay anything
I owe $215K on a house worth $1.6M, so no worries for me. I pay off at least $4K principle monthly and currently I pay about $1K interest monthly.
Our household earns approx $200K PA but i would never get a mortgage of $500K, let alone $700K. That seems madness, especially on the downside of possible lower house prices and increasing interest rates. I know a few people in this position and I do not envy them. They are all in their early fiorties so by the time they pay the house off what have they got for retirement?
so you have 1.4m net. why not sell up and invest in the sharemarket and rent. you should clear 200k a year in Dividends and capital gain. if prices remain stable you can buy in a year without a mortgage if prices fall even slightly (they are already on the way) then you are ahead.
Zachary, I did just that, for ten years. Sold up in 2006 in US and became a renter, moved to NZ in 2007, and stopped renting and bought property 2016. I am much better off financially than if I would have been as a property owner during this time period given the places i had lived at (not Auckland!). It was only last year when it became cheaper to own than rent in Hawkes Bay. We are finding that owning a lifestyle section has a lot of costs that were not apparent to us prior to buying. Good thing we saved extra money in the preceding 10 years of renting/investing... :)
For the record I sold my share market holdings in the US when we left in early October 2007. Got "lucky" twice in timing both property and share market....
Just ask Gareth Morgan. Invest $500 k (or whatever) in a home. No taxable income gained, so no tax - even thugh you are receiving a return by way of accomodation. . Own $500k of shares instead, get taxed on the income and pay rent from after tax personal paid income. The home owner has a tax advantage. Thats one reason why Zachary.
RBNZ does not have control except floating, it is determined by lenders who fund our banks from offshore.
to take a positive out of a negative, at least we have low home ownership rates 60% and of those many will be on small or no mortgage ( my guess 10-15%) so those that will be hurt will be those that are highly leveraged investors and those poor sheep that thought it was a good idea to take out big mortgages as we had low interest rates and rising house prices. ( my Guess the same 10-15%)
I disagree. The RBNZ does have a significant amount of control over retail rates in New Zealand.
Perhaps a decrease in the OCR won't effect a unity amount change in retail rates (as we have sometimes seen, supporting the offshore lending element). However, you can be assured that any increase in the OCR will result in a close to unity increase in retail lending rates.
Im curious to know how the RBNZ controls' longer term rates..??
As far as I know.... their primary influence is on the short term rates...
(A sign of that is the that floating mortgage rates are alot higher than fixed rates. )
If they wanted to control long term rates , they would have to do a form of QE. (or have some kind of foreign Capital flow control )
Offshore influences, largely, control our longer term rates.... in my view
After all..we are a Debtor nation..
Sure... Banks play the yield curve....
But that is NOT the RBNZ controlling things and that does not explain why the floating rates are well above longer term fixed rates...
In a Global world... u are wrong to assert that there is an intrinsic relationship between the OCR and long term rates...
So.... I get what u are saying and I disagree with you, as to the degree of influence the RBNZ has over long rates...
No... Generally, in normal times, Central Banks only have a powerful influence at the short end of the yield curve... in my view
I guess they hope and pray it flows on thru to the longer end, like it should..??( the pushing on a string metaphor comes to mind )
Central Bank Expectation formation is just one of many influences on the mkt
( expectation formation... I tried that with online dating ...and it worked great,... until we met... )
The FED had to use QE to bring long term rates down, as part of their efforts to "reflate" the economy.
You said The RBNZ does have a significant amount of control over retail rates in New Zealand
I said... The Reserve Bank DOES NOT control long term rates... At best, it tries to influence long term rates thru its control/influence of short term rates.., ( and in a Global world, they are less able to do so )
The distinction is that I use the word "influence" and you use the terms "intrinsic" and "control".
U are using a politicians poetic licence to suggest we agree..
Also... in regards to expectations, inflation/deflation outlooks play a huge part in the game....etc..etc..
dropped them twice but no decreases only increase since then - think you will find they don't have a lot of control - and the banks will respond to international borrowing regardless
It will be the pressure on the banks own equity levels - and their worry that large scale defaults on loans will trigger runs on the banks that will limit their rises not RBNZ
Brutus - look at history. The 1980's saw mortgage rates hiked to over 20% to fix a problem, and many couldn't handle those levels and lost their houses. Rate hikes are designed to hurt, and in this case it isn't going to have to go back much about 6-7% to really hurt the more vunerable. And don't think every vumerable person will feel the same pain, many have recognised that vunerability and fixed. Those that rely upon the RBNZ not wanting to cause pain, and think everyone will feel it the same, don't understand economics and markets
I wonder how many "mum & dad' Auckland property investors are now saying, "what have we done?" buying that $775,000 "Ranui Palace" late 2015.
I have said it here before, but when there is no "capital gains" in the market, you have an asset that is losing on 2 counts ...no capital appreciation, so mortgage interest payments are just cream for the banks ....... and again ....Banks 1 Property Investor 0
And, higher interest rates will only exacerbate the above ..... good luck !
Indeed KH but the current expert opinion as published here on Interest.co.nz is that they will go up by 7%. It appears to be the opinion of most of the banks as well when they gave their forecasts for the year.
Many Mum and Dad investors will have mortgage free homes and two incomes coming in. To them it may still look like a good bet considering. May have to put off that cruise around the Med for a year if they lose a bit this year.
Go up by 7%?, but the last 3 months have seen declining values in Auckland. Are we now using alternative facts to prop up the ponzi housing market. Cant wait for the Feb stats when all that Chinese money flows in - past the great wall.https://www.bloomberg.com/news/articles/2017-01-24/china-s-efforts-to-s…
Zachary i find the various entrenched postions re house values quite entertaining.
What appears to favour the negative is the end of the frenzied auctions - presumably a sign of the absent foreigners (who we apparently didnt have anyway), the lifitng (although slight) of interest rates, the flat linning gdp, Trump, credit squeeze, the elections and so on.
I'm not sure why things can keep pumping when so much has changed? If the cap gains go, how long will investors sit and pump cash inot a loss makaing capital stagnant asset?
My pick is that it will take a while, but if it becomes apparent that cap gain is dead (and the rental needs a new roof) then the real decline will begin. We havent got there yet, but seems a good chance.
That's how I see it at present....but who knows huh?
Westpac picking 5% increase for the year
https://www.westpac.co.nz/assets/Business/Economic-Updates/2017/Weekly-…
Thanks for that sharetrader. I have been searching for the Interest article that had the opinions of the chief economists for the main banks about where house prices were heading in 2017 but can't seem to locate it. The general consensus, if I remember correctly, was that house price growth would slow down to the single digits in 2017.
could be, time will tell. But is it worth their risk? they may make 50k, they may lose 50k. hell of a bet to make at the casino, but when it costs you 4% to sell they need prices to go up 807,290 to get their money back (less legal fees etc. as 2k) so to make the 50K they need to get 861,458, either way the real estate agents will WIN between 32 and 34k
sounds like a suckers game doesn't it?
could be, time will tell. But is it worth their risk? they may make 50k, they may lose 50k. hell of a bet to make at the casino, but when it costs you 4% to sell they need prices to go up 807,290 to get their money back (less legal fees etc. as 2k) so to make the 50K they need to get 861,458, either way the real estate agents will WIN between 32 and 34k
sounds like a suckers game doesn't it?
The recent slowing in prices as a result of the LVR restrictions demonstrate that many of the would be buyers were already extended out as far as they could be in what they could borrow. So. If interest rates increase just a bit then those extended borrowers will be in trouble immediately. For some it will have already happened.
Probably a lot of them are borrow and hope 'investors'. That "Ranui Palace" will be a nightmare for them. Expect some distressed sales.
The reason for low mortgagee sales is that interest rates are still low and debt servicing is at an almost historic low relative to household income. The pain will only begin as interest rates increase and even then there's going to be a couple of years of lag as the fixed rates come due.
Ted, imagine for a moment, you have just felt the shockwaves of a massive offshore "earthquake". You are standing on a nice but overvalued (vulnerable) coastal property, as the tide slowly recedes away from you, the gulls have disappeared and it is very quiet, almost too quiet. You can see the sand stretch out for a kilometre or more in front of you, teasing you, to explore, where you have never been able to walk before.
If consumption keeps outstripping production then a correction must happen, the higher house prices the more severe the correction. Australia has a housing bubble and so do we, money for nothing needs to be regulated because it is so damaging to the productive economy.
http://bawerk.net/2013/08/19/debt-excess-and-the-liquidation-process-in…
Great Article AJ,
Couple of points I'd make ...:
Even though we can label debt as it enters the economy ( good debt, bad debt, destructive debt)... once it enters it can flow anywhere .... "one mans spending is another mans income"...
I think one of Chinas problems was too much debt going into productive investment, creating over capacity and malinvestment...... so...too much good debt becomes badish debt.
The other point... It is private sector debt that causes financial crisis.
The 2 metrics I watch for are private sector debt/GDP ratio and
the rate of growth of that ratio within a period of time..
( The worst financial crisis is when that debt growth is mostly in real estate..... )
The information is out there. So how bad before action?
http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-household-debt
http://morganfoundation.org.nz/housing-debt-bubble-no-surprise/
AJ
We have private sector debt at over 150% of GDP
The trip wire, so to speak, is for an 18% growth of that debt/GDP ratio in a 5yr period. ( that implies an extended credit boom, and that debt service costs are increasing faster than income ).....
We are not there yet .... The reserve Bank seems to have an eye on the credit aggregates....so I reckon we are a few yrs away from crisis.. eg... In 2004-2007 credit growth in housing was around 15%/yr... In this cycle it has ,maybe averaged around 7-8%.. ( and yet... prices have been ballistic, Maybe that has something to do with the massive revaluation of land as a result of the unitary plan..?? )
Does not smell like a bubble that is about to burst... to me, anyway. ( NZ real estate )
There wont be any action... in my view... This system is entrenched...
At best there might be band aid solutions...
I'm picking recession in end of 2018/2019 and the big crash in 2025-2026, When the USA Real Estate Cycle matures... ( the movement towards Minskylike instability takes time.. )
The GFC was sort of like a "reset" .... in the crisis sense... central Banks have their eye on the Ball and the Banks have been healing balance sheets... and the forces of deflation are diminishing..
AND.... Govts have a taste for spending.....
This is all just my view, of course..... with guesswork... We can only play the game based on our own understanding, and our best guess .... I suppose
It will be interesting to see how low the RBNZ takes the OCR when fall into the next recession..??
I agree housing should be only for people to live in and there should be legislation to force the option of owner occupier or rental only or a limit on vacancy.
New Zealand has a great dependancy on China trade and we need to have closer relations and not block Chinese from living in our country. Our Banks need to review their restriction on overseas income in all fairness.
I think investment in housing should be discouraged as it is one of the driving factors of house prices. Understandably, the LVR rules around investment have tried to do that but if what you say is true it's only a matter of time before house prices rise and therefore open up one's 'capital' to borrow against.
Our reliance on China is due to tariffs imposed on New Zealand due to Europe and US trade restrictions and being able to enter those markets more freely will assist with that. But i don't think we're going to be a rich country buying and selling houses to each other at ever increasing prices, the only ones who will win will be the banks.
interesting article on that about Germany
http://www.stuff.co.nz/business/property/88739960/germany-may-hold-the-…
No country is immune to the effects of ultra low interest rates and fiat money printing
http://www.tradingeconomics.com/germany/housing-index
Norway is all in
http://bawerk.net/2016/08/19/toward-stagflation/
Surely banks would have been prudent enough, not to lend amounts that their customers would have trouble paying back if rates rose by a bit? Don't they stress test customers? Would insurance cover the shortfall if they couldn't afford to keep up the payments, if the rates did rise?
People's employment and pay situation changes.
People clock up consumer debt with interest. While they look good in the calculations they have a lifestyle with debt payments sucking up every spare dollar.
Most people live from pay to pay so any disruption to cash flow can trigger a crisis.
Those that got a large debt at interest only will discover interest and principle payments require a much larger payment.
If things get bad enough it's not about insurance or interest rates it's instead about reduced spending due to increased debt servicing costs.
Even if you don't think those will be problems (they won't be for everyone but we only need about 10% of people to screw things up); household debt has kept climbing to a record high that is large enough to harm GDP growth as interest rates increase. Then combine that with low inflation (which is usually used to diminish debt) and stagnant pay which gives you a massive debt problem. That problem isn't going to disappear overnight.
Don't forget, about $1.2bn of lending each month is interest only to owner occupiers!!
http://rbnz.govt.nz/statistics/c32
So, with a limit of ~5 years that a borrower can stay interest only, there are a huge number of owner occupier borrowers out there who have a US style 'adjustable rate' mortgage hit on its way.
Bank - "Dear Householder, your five years of interest only have passed, you repayments will now be 25% higher"
Householder - "But I can barely afford my current repayments with interest rates going up!! I do have some equity though"
Bank - "That's nice. Keys please".
And if the rise in interest rates is accompanied by a fall in house prices, it will compound their problems and also increase the risk that the banks may not get back all of the money they loaned against the properties.
Oops
It cannot be said that the “market” is functioning when mortgage rates are required to move ever-lower to maintain any positive growth in dispersed finance. This is the Fed’s primary monetary channel, after all, and to have mortgage activity collapse so precipitously on slightly-less-than record low interest rates is a key clue that the overall housing market was again captured in the mirage of “stimulus.” Read more
Looking at the data , I would argue that where interest rates sit at present, those with mortgages coming off 2 3 and 5 year fixed are likely to see a reduction in payments, which will be the bulk of mortgage holders. Thru the September quarter , the average across all mortgage debt was 4.6 percent, down from 5.85 percent in 2015 and 5.8 percent in 2014. Although we have added 33 Billion more in mortgage debt over the past 2 years , the reality is ,only those fixed for 1 year or on variable rates will likely feel some immediate but minimal discomfort, whilst those above will get .some reasonable relief. To give an indication of how prevalent interest only mortgages have become , to pay off the total mortgage debt as of the September quarter would take 40.5 years, so much for 20 or 30 year mortgages. Dependent on what a person's global view is, whether its armageddon or other , the RBNZ unless due to external events , is going to struggle to push up interest rates with the NZD rising and credit growth already slowing, and 4 banks that will at some point happily devour one another for market share.
It is not necessarily the next two or three years that will see the problem. Those who are coming off their current fixed rate will most likely have smaller mortgages than those that have recently taken on a mortgage. The problem will occur several years down the track if interest rates continue to rise and people have to renegotiate their next fixed term.
That's very true SH, imagine the market collapsing, while some people have taken up to 80% loan, not only people with large sum amount of loan will be effected, banks won't be able resale, predominantly the economy will be in under water. Whats done is done, at this stage you want the property market to stabilize rather then a sudden correction as it will lead to more bigger issues that will effect everyone.
Agree that if prices crash the economy will be toast, if interest rates go up so much disposable income will be taken out of the economy. OCR cuts don't make much difference these days. If the market crashes I wonder if the RBNZ will go into their toolbox and cut or remove LVR restrictions to halt house price crash.
It has happened before, only in the share market. With housing being used like a sharemarket, I reckon it has now taken on the same risks. Just one little rug under it needs pulling out and it will be a goner, but I reckon a number of them are being pulled out, if not whipped out, then a bit more slowly, but once gone so is the market. If the Chinese buyers do not come back in February, it will be swift, exactly the reason foreigners should NEVER have been allowed to play fast and loose with our housing market.
They will never let the house prices bottom out, leveling it is the best they can do, prices will still go up but it will be gradual for a while from here on. Foreign investors have had a big impact with the current rise but they have not always invested like they did in the last few years, still the prices did rise in the years prior due to other factors.
That's right, I have been saying for 2 years to all the people that want a real estate collapse, which is what will happen IF interest rates reach 7% that not only house owners will hurt but that WE WILL ALL BE WORSE OFF. But most people are too narrow minded to understand this
not sure on that, there will be plenty that will make more money, those will little or no debt will pick through the prime assets, and since we are so open overseas buyers will see bargains everywhere
if you mean inequality will increase more rapidly yes I would agree on that
No, no but hey, if people want to allow the market to be a free one, then the downs will have to be taken with the ups. Trouble is everything has actually been skewed in such a manner that it locked in a rise to ridiculous heights,far beyond what the local market, on its own, would have allowed. What we have been calling for was controls on aspects of demand not just "supply, supply" chorus, so what is likely to happen in the very near future, did not. Might be wise to be a renter for a while.
Yvil,
Interest rates of 7%. Can I assume you mean mortgage rates,rather than the OCR? With no debt and a not insignificant amount in TDs,i should welcome higher interest rates,but I doubt if they will go significantly higher.
There are just too many dark clouds over the global economy;slowing Chinese growth,assuming that the official figures are even remotely credible,anaemic growth prospects in Europe, too much global debt and the deflationary effects of technology will act as dampeners on interest rates.
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