Nation of debt: Housing debt jumps 19pc in just two years

Housing debt levels have risen 19pc in two years. Photo / File

Covid-19 has resulted in New Zealand mortgage interest rates falling to their lowest levels ever, but at the same time, it has also seen housing debt hit an all-time high.

In the two years between June 2019 and June this year, the country's housing debt rose 19 per cent to $317.6 billion - with most of that rise coming in the past year to June.

Kelvin Davidson, chief economist at property data company CoreLogic, says low rates have been a big driver behind the rise in debt.

"It has meant people can afford to pay a bit more, the bank is happy to give them a bit more, they borrow a bit more and then it gets a bit circular - that pushes up house prices so people have to borrow more which pushes house prices up.

"It's a bit chicken and egg."

When Covid hit New Zealand in February last year, the Reserve Bank cut the official cash rate to 0.25 per cent in an emergency announcement, then proceeded to drop loan-to-value restrictions, to allow mortgage deferrals without triggering bank lending ratio breaches.

With no lending restrictions and low returns on bank term deposits, investors flooded into buying property until earlier this year, when the Reserve Bank slammed restrictions back on bank lending to investors.

While the housing market is up by about 30 per cent over the past year, the number of people with million-dollar mortgages has doubled to over 76,000, and nearly 10,000 Kiwis (9800) have a mortgage of $2 million or more.

That's a concern, says Davidson. "It has got bigger and that is inherently riskier than if you had lower debt."

The Reserve Bank this week kept the official cash rate at 0.25 per cent after New Zealand went into a Level 4 lockdown spurred by a new Covid case in Auckland.

But it is still signalling that the cash rate is likely to head up soon, labelling the current level of house prices as "unsustainable".

Davidson said the proof of the pudding would be how borrowers cope with mortgage rate rises.

"Could we start to see some problems arising from that? Certainly the average mortgage size is bigger than it used to be - people have been taking out loans, especially recent entrants to the market, at a higher ratio relative to their income and also some first-home buyers have had lower deposits as well.

"The Reserve Bank has certainly flagged it up."

Nick Tuffley, chief economist at the ASB, says the build-up in debt in percentage terms is not as high as it was before the global financial crisis in 2008-09.

"We have seen the ratio of debt to disposable incomes lift quite rapidly since the start of the pandemic, we have gone from 159 per cent of household disposable income to 167 per cent. That is a bit of a lift and it has certainly taken it back to a record level."

But he says that needs to be put into context, with the share of household disposable income going towards servicing that debt at very low levels.

"We have got records that go back to the early 1990s and the share of income going to debt servicing is by far the lowest it has ever been. When you are looking at the household sector in total, we are starting from a point where, because interest rates have come down rapidly, the collective debt servicing burden is low."

ASB chief economist Nick Tuffley. Photo / File

And Tuffley suggests it could even go lower yet.

"Earlier on this year, the weighted average mortgage rate people were paying was 3.5 per cent and when you reflect on the fact that even right now you can still get mortgage rates well below 3 per cent, you can see there is still going to be a number of people rolling off an interest rate onto a lower one for a period as well."

Tuffley said loan-to-value ratio restrictions, which have been in place since October 2013, meant there was a far lower proportion of low-equity loans on banks' books.

"So the number of people that might suddenly find they are in negative equity with a substantial fall in house prices is quite restricted. And another really important thing to remember at the moment is even though you can get a mortgage rate at 2-something per cent, most banks are applying a servicing interest rate of 6 plus per cent. There is a huge buffer in there in terms of those calculations."

Tuffley said it was the people who had borrowed over the past year and probably had a reasonably high share of their income going towards debt servicing who would be most vulnerable to higher interest rates - the main real financial risk for borrowers at the moment.

"But when you put everybody together, we've got really low debt servicing costs on average, tighter lending standards, at least amongst the banks, and a huge buffer from a debt servicing calculation point of view. That does mean the bank lending for housing has got quite a lot of safety checks around it - both from a point of view of the banks and the borrowers as well."

Still, Davidson says it is the proportional increase in mortgage repayments that he worries about, and whether borrowers have even thought about the potential cost increase.

"The true effect of this rapid growth in house prices and growth in debt has been masked by the low level of mortgage rates and the low level has driven it as well. The reality might start to hit when you might pay $1000 a fortnight and if mortgage rates go from 2.5 to 4 and push 5 over the longer term, that is suddenly $2000.

"I know the banks test serviceability, but have borrowers actually thought - it is one thing for banks to test, it's another for borrowers to actually go 'what does this mean for my finances?' I think rising mortgage rates is definitely a big test and people recognising that proportionally it is going to be quite a big shift."