I’ll make no predictions here about the immediate direction of house prices, other than to note two things:
One – inbound migration is soaring again (and people need places to live).
Two – data with that latest FSR from the RBNZ shows – to my surprise – that ‘affordability’ in Auckland was as of March 2023 at its most favourable (lowest) level since November 2014. That’s right, by this measure Auckland houses are now the most ‘affordable’ they’ve been in nearly nine years.
Comments by David Hargreaves
See full article from Interest.co.nz below:
By David Hargreaves
I suspect we’ll get away with it. This time.
The fact is, however, there are a number of worrying and unsatisfactory aspects to the current situation with “the New Zealand economy” – by which I mean our houses and mortgages.
For me, the Reserve Bank’s latest, six monthly, Financial Stability Report (FSR), was a bit like a delayed-action bomb. The report carried more impact than it first appeared to.
The more I think about it, the more I think I’m pretty perturbed by the thought that around a quarter of our outstanding mortgages by value (about $87 billion-worth) were taken up by homeowners buying into the white-hot housing market of late-2020 to late-2021.
Add in to this state of unease the admission from RBNZ officials, after a fair bit of (surprisingly well-focused) probing from MPs, that the $87 billion-worth was not subjected to stress testing at interest rates now prevailing, and we’ve got quite a queasy-making sandwich.
Now, there’s two not-good factors in play here. First up is that about $87 billion of mortgage money has been splashed on houses that are now worth less than was paid for them. Remember, according to REINZ figures house prices nationwide are down 17.5% from the November 2021 peak.
Secondly the ability of the people to service those mortgages has not been tested at current interest rates. So, while it’s true to say that nobody will be facing interest costs ‘much’ more than they were tested for, the ability of at least some to pay and to manage is an unknown quantity.
The Reserve Bank is playing this down. But of course it would. It has caused the current situation with such a rapid rise in interest rates.
Essentially what we’ve had here is our central bank (along with others everywhere) being surprised at firstly the magnitude, then secondly the persistence, of inflation. That’s necessitated hiking interest rates faster and further than originally intended. The speed with which interest rates have been increased has been unprecedented. And that was from historically low levels. It was always going to be a problematic situation.
All the current evidence is that people are managing – for now. There’s no doubt a lot of people were able to save money during the pandemic (getting shut in your house for weeks on end will do that) and many people have been ahead of mortgage payments, largely due to how amazingly low interest rates were till late 2021.
The other hugely helpful factor is the almost non-existent unemployment, at just 3.4%. Even if a mortgage holder does get ‘under water’, with their mortgage exceeding the value of their house, as long as they can keep servicing the debt they are ‘okay’. Albeit that it’s not a situation I would wish on my worst enemy.
I’ll make no predictions here about the immediate direction of house prices, other than to note two things:
One – inbound migration is soaring again (and people need places to live).
Two – data with that latest FSR from the RBNZ shows – to my surprise – that ‘affordability’ in Auckland as measured by how many times the house price exceeds household disposable income was as of March 2023 at its most favourable (IE lowest) level since all the way back in November 2014. That’s right, by this measure Auckland houses are now the most ‘affordable’ they’ve been in nearly nine years.
Look, I don’t think paying 10.2-times disposable income (which is what it was in Auckland as of March) is in any way ‘cheap’, but there may be a few people out there soon who start to think so. And Auckland always leads the NZ housing market. Watch this space.
All things considered then, I reckon we are (mostly) going to be ‘okay’ with our current housing and mortgage issues. We are going to get through. We are going to ‘get away with it’. But that’s probably going to be down to good luck rather than good judgement. That 40% pandemic-induced house price surge may not prove to be as damaging as it could have been.
I would say there need to be some extra safeguards in place for the future. It may well be that next year could finally see introduction of debt-to-income restrictions, a macro-prudential tool the RBNZ has been hankering after since 2016. These would obviously be a helpful backstop.
Earlier the RBNZ had looked at setting a ‘test interest rate floor’ for the banks, but ultimately decided against this. Well, actually, I don’t see why we can’t have both DTIs and ‘test interest rate floors’.
Remember, it is the fact that the setting of test interest rate levels (or stress-testing levels if you prefer) has been left to each of the banks’ individual discretion that has led to the situation where 25% of the outstanding mortgage stock hasn’t been stress tested at current interest rate levels.
Yes, as explained above our central bank along with all others around the world got caught out by inflation and has ramped up interest rates to an extent that was not anticipated in such a short period. But maybe the lesson is we need better safeguards around if the RBNZ has to move rates in such a precipitous manner again.
The latest RBNZ FSR document detailed the stress testing levels employed over recent years by the big five banks. And these have been very variable. For the record, this link outlines the situation as of last month.
A close look at the data that went into the graph above shows that at times the difference between the highest test rate and lowest test rate applied among those five banks has been as much as 1.8 percentage points. That’s quite a difference. In March 2021 (when the housing market was ragingly hot) one of the big five banks (and the RBNZ doesn’t disclose who is who) was testing customers on a rate of 5.5%, while another was testing customers at 7.3%.
The significance of that is that customers of the bank that tested at 5.5% are now facing rates well over a percentage point higher than they were tested on, while customers that were tested at 7.3% are below current rates – well, the ‘special’ rates anyway.
The test rates offered by individual banks have over time varied from anywhere between just 1.9 percentage points over current ‘special’ mortgage rates and 4.7 percentage points over. Big variance.
So, what about a uniform standard – and one that provides plenty of leeway for rising rates? I know the RBNZ has previously ruled it out, but reckon they should reconsider. And I reckon banks should have to test at least 4 percentage points over the current rates.
Then what about interest rates themselves, and what happens when they start coming down again? I here again put in a plug for the idea in recent RBNZ research about the central bank increasing interest rates to prevent house prices getting as out of whack as they have previously in this country.
These are just some ideas.
We really do need to be thinking about how we avoid large numbers of Kiwis putting themselves financially at risk in future. And we need to be thinking about that BEFORE the house market takes off again.