Household financial stress likely to grow: RBNZ

Pockets of financial stress among households are likely to grow in the medium term because of rising debt-servicing burdens, but most mortgage borrowers have kept up with their payments so far, says the Reserve Bank.

It expects the effective mortgage rate, the average rate paid across all mortgages, will reach 6.4% by mid-2024, up from the low at 2.9% in late 2021, RBNZ says in its latest financial stability report.

“The average share of their disposable income going to interest payments is expected to rise from a low of 9% in 2021 to around 18% by the middle of 2024,” it says.

This is still well below previous periods of financial stress, such as in the late 2000s.

But “the adjustment to higher interest rates is likely to be felt more strongly by certain cohorts of borrowers.”

The central bank says this includes those who borrowed in 2020 and 2021 to purchase houses at high debt-to-income (DTI) ratios.

The central bank is continuing to develop DTI lending restrictions and banks are also getting ready for them and should have reporting and management systems in place so that DTI restrictions could be introduced by April 2024.

RBNZ plans to consult on introducing DTIs early in 2024.

“Measures of acute financial distress, such as loan arrears, have been steadily increasing over the past year but remain well below levels seen following the GFC.”

So far, households have been able to adapt by cutting discretionary spending and have also been supported by strong income growth, but more borrowers are likely to fall into arrears in the coming year.

But mortgage holders have been missing repayments on other debt at a greater rate than those without mortgages.

“This suggests debt-servicing strains faced by mortgaged households may be greater than shown simply by mortgage arrears.”

RBNZ says while shorter-term mortgage rates have continued to climb, longer-term rates have generally stabilised in the last six months.

It notes banks' test interest rates used to assess prospective borrowers' ability to pay have increased only slightly from 8.75% to 9% while median house prices have dropped from about 11 times incomes to about nine times, reflecting rising incomes.

Prices relative to incomes has dropped more strongly in Auckland and are back to 2013 levels.

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