Borrowers are about to face a "day of reckoning" when the around $160 billion of fixed-rate housing loans come up for review in the next year, said an economist after yesterday's Official Cash Rate rise.
Kelvin Davidson, CoreLogic's chief property economist, said around $330b was loaned by banks to homeowners.
Around half of those will be reviewed before next winter, he said.
The Reserve Bank of New Zealand (RBNZ) increased the OCR by 50 basis points to 2 per cent and delivered a hawkish Monetary Policy Statement, pointing to much higher rates ahead as it chases down inflation.
Davidson said although it's not clear exactly when those $160b of loans were taken out, many borrowers would be forced to pay higher interest rates which could put them under financial stress.
"If you took the loan out three years ago, your interest rates might not change that much. But if it was fixed only say a year ago, those people could go from paying around 2.5 per cent interest per annum to 5.5 per cent per annum," he said.
The effect of mortgage stress on those borrowers is as yet unknown but Davidson said further pressure would certainly go on the housing market with yesterday's hike.
Many borrowers were yet to face the true consequences of rising interest rates, he said.
"That day of reckoning will happen within the next 12 months," Davidson said, recalling that the Reserve Bank had indicated that house prices might drop by about 12 per cent from peak to trough.
"For the housing market, the implications are clear: we're not yet at the end of this rising cycle for mortgage rates and that will keep a degree of downwards pressure on property values," he said.
Interest rate rises had been faster and bigger than what had actually happened to the OCR so far but that wouldn't be a lot of comfort for new buyers now facing rates of up to 5 per cent and heading higher.
"It's not only the cost of debt that is a factor; it's also the reduced availability," Davidson said, referring to debt to income ratio caps.
Banks were probably enforcing their own limits to some degree anyway, he said.
"On top of all of that, the serviceability test rates are another barrier, now generally sitting at 7 per cent or above," Davidson said.
Growing fears about a recession might mean the OCR settles at a lower level than currently projected by the Reserve Bank, he said.
A continued low unemployment rate should help to insulate the property market from a major downturn to some degree, Davidson said.
But it's still looking likely that the current correction for property values isn't over yet.
Real Estate Institute chief executive Jen Baird said the increase in interest rates over the past few months continued to impact the property market.
"Higher mortgage rates alongside tightened lending criteria and LVRs have considerably changed the dynamics within the property market, seeing demand soften nationwide," she said in reaction to the RBNZ's move.
Last week's Budget delivered increases to the cap on the price of property eligible for a first home grant and the removal of caps for first home loans. Baird said that was some welcome relief and offered greater choice to first home buyers.
"While we may see first home buyers reconsider their options in the market, they will now be factoring in further interest rate rises," she said.
The RBNZ's Monetary Policy Statement yesterday said banks expect demand for housing credit to continue to fall in the coming months.
"House prices have fallen by about 5 per cent since their peak in November, towards more sustainable levels. Many factors have contributed to the downward pressure on house prices and sales, including: higher mortgage rates, changes to the Credit Contracts and Consumer Finance Act, the removal of interest deductibility for investors, tighter loan-to-value ratio requirements, lower net immigration growth, increased housing supply, with a recent record number of building consents," the RBNZ said in the May statement.
From their peak in November 2021, the RBNZ expects house prices to fall by about 14 per cent by early 2024.
"While this seems like a relatively large decline compared to New Zealand's history, it would bring prices back to only April 2021 levels. That said, the size and speed of the fall in house prices are highly uncertain," it said in the statement.
A 30 per cent decline in house prices from their peak would be required to bring them back to their pre-Covid-19 levels.
"As a result, many homeowners have significant equity buffers - the value of their homes less their mortgage debts. A very small proportion of households, estimated at around one per cent of total mortgage lending, would be in negative equity, where a home is worth less than its mortgage, in our central projection.
"If house prices returned to their pre-Covid-19 levels, we estimate that around 10 per cent of housing debt would be in negative equity," the Monetary Policy Statement said.
Lower migration was also weighing on housing demand, it said.