Reserve Bank concerned half of first home buyers face mortgage distress when rates hit 6%

Rising mortgage rates will put the heat on first-home buyers. Photo / NZME

The Reserve Bank is concerned that half of last year's first-home buyers could face difficulty servicing their mortgages if mortgage rates hit 6 per cent.

This is especially concerning following first-home buyers' mortgage binge in 2021, when they borrowed $17.88 billion across 32,493 separate loans. That borrowing is more than $10b higher than four years prior, when first-home buyers borrowed $8.4b across 21,685 loans.

The warning comes from a September 2021 briefing to Finance Minister Grant Robertson from the Reserve Bank, released to the Herald under the Official Information Act.

The paper said New Zealand's "surge in house prices in the last 12 months" had meant the "average mortgage has become larger", and therefore "a small increase in interest rates would have a bigger impact on debt servicing costs than normal".

The bank reckoned if mortgage rates hit 6 per cent, 49 per cent of first-home buyers would face "serviceability stress".

In this context, "serviceability stress" does not mean the borrower would default, instead, it measures the number of people who will need to "sharply reduce their living expenses" to keep on top of their mortgage. Banks usually test if borrowers can continue servicing their mortgages at rates of 6 per cent before offering them a loan.

This is important for the bank, because if large numbers of homeowners cut back on spending, economic growth will slow. The bank reckons when mortgage rates hit 6 per cent, 23 per cent of owner-occupiers and 34 per cent of investors would find themselves in distress too.

National's housing spokeswoman Nicola Willis said the briefing highlighted "how hard the cost of living crisis is going to be for a lot of New Zealanders in the next 12 months".

"The reality is a lot of people have really stretched to buy a home in a really difficult market, and having stretched to buy a house they are now going to be confronted by rising interest rates," Willis said.

She added this would be particularly difficult in light of the fact inflation means people's incomes are already stretched.

The Reserve Bank reckons nearly half of first-home buyers could be in serviceability stress if mortgage rates rise. Photo / RBNZ

Robertson said the Government had warned buyers that mortgage terms could change.

"I've consistently said over the last couple of years that as people are borrowing money that they need to be aware that the repayment terms that they have will change. For some people that will cause a degree of stress," Robertson said.

Green Party finance spokeswoman Chlöe Swarbrick said the briefing showed the Government's heavy reliance on the Reserve Bank's monetary support to get it through the pandemic, rather than more conventional tax and spend fiscal policy.

"Those with enough capital to treat the property market as a game can make a profit when interest rates are low or high, but those who are just trying to find a place to live and put down roots face a squeeze from both high prices when they buy, and interest rate increases once they've already taken on huge debt," Swarbrick said.

"The Government cannot say they want to help first-home buyers while they continue to set them up to take on far more risk with far less reward than speculators. Tilting the balance obviously isn't anywhere near enough. The Government must use all the tools available to it - instead of constantly ruling them out - to restore the balance," she said.

While 6 per cent for a 12-month fixed mortgage may seem like a lot now, you only have to go back to 2014 to see fixed rates top 5 per cent, although you have to go back to 2011 to find a time when the 12-month rate was above 6 per cent.

The Reserve Bank has also been clear it wants to push interest rates up higher to tackle inflation.

Of course, if serviceability stress starts to bite and households cut back on spending, the Reserve Bank might consider its job done and put off any further hikes.

Infometrics economist Brad Olsen said he was forecasting the Reserve Bank's Official Cash Rate to peak at 2.75 at the end of 2023, which would drive one-year fixed mortgage rates of just below 5 per cent.

He said other choices the bank makes, like what to do with the billions of dollars of Government debt it has bought, will also have an impact on where mortgage rates go.

But even with borrowing rates of 5 per cent, the Reserve Bank reckons a fifth of first-home buyers would be in serviceability stress.

Rising mortgage rates are not the only thing the Reserve Bank reckons will hit first-home buyers - people trying to get on the property ladder by buying into a new development could also find themselves in trouble as rising construction costs and rising interest rates began to squeeze small developers.

The briefing said retail banks had been sounding the alarm about "small and inexperienced developers" being caught out by the rampant cost of inflation seen in the building sector.

The Reserve Bank warned Robertson an increase in debt servicing costs could stretch these inflation-battered developers over the edge.