Financial stress stabilises while household credit demand picks up

Fewer borrowers are now falling behind on debt repayments.

Borrowers who had previously been in default are finding ways to mitigate stress with the lower debt-servicing costs, the RBNZ says.

Longer-term arrears and impairments have stabilised, but have not improved materially yet, although banks expect non-performing loans to continue to drop over the next year, supported by improved borrower cashflows.

The RBNZ’s September figures for non-performing loans show they have dropped for three months in a row to $2.27 billion, down by $185 million.
Instances of mortgagee sales remain low.

The report says new mortgage lending with relatively high debt-to-income (DTI) ratios and loan-to-value ratios (LVR) has picked up but remains low.

Looser LVR restrictions will be allowed from December. The RBNZ says the risks associated with new mortgage lending are contained. “House prices remain near the top of our range of sustainable estimates.

“The introduction of debt-to-income (DTI) restrictions last year means LVR settings can be less restrictive on average. This includes looser default settings that we expect will be in place most of the time, except for when risks are particularly elevated.”

While the likely impact of this easing on the housing market will be small, the RBNZ says it will give banks slightly more flexibility. Over time, it expects this will help minimise the unintended impacts of the policy and support access to credit.

Mortgage borrowers continue to shift from relatively high floating rates to lower fixed rates, as expectations increase that the OCR is nearing its trough in the current cycle.

Many borrowers are switching lenders more often for more favourable lending terms and lenders are competing more aggressively for borrowers.

Banks have continued to reduce their serviceability test rates for new borrowers as mortgage rates have declined.

Housing market activity picks up but prices flat

House market activity has picked up from its low point in 2023, supported by lower interest rates and policy changes, the RBNZ says.

National house prices remain about 12% below their November 2021 peak and have been broadly flat over the past three years.

Elevated housing inventories in Auckland and Wellington are weighing on house prices, reflecting the soft labour market and low net migration, and offsetting stronger house price growth in parts of the South Island.

Low levels of net migration and a soft labour market continue to restrain housing demand.

Falling rents and low expectations of capital gains are weighing on investor demand, although the reinstatement of interest deductibility for tax has provided some support, the report says.

Number of stressed commercial property borrowers falls 

In the commercial property sector, lower interest rates have benefited borrowers  and contributed to higher interest coverage ratios and improved repayment capacity.

The RBNZ says as a result, the share of commercial property borrowers assessed as potentially stressed or non-performing has fallen.

Industrial properties and higher-quality retail and office properties are performing well, while secondary retail and lower-grade office spaces continue to face higher vacancy rates.

Credit demand from commercial property borrowers remains sluggish, particularly for development lending.

Competition for lending opportunities to commercial property development has strengthened, including from offshore lenders.

Household credit demand picks up

Household credit demand has begun to recover, supported by falling interest rates.

However, a subdued labour market, lack of confidence, and soft housing demand continue to hold back a stronger recovery in household lending.

Personal consumer credit growth remains weak, reflecting household caution and low demand for traditional credit cards among younger borrowers.