Mortgage arrears up and still rising slowly

This is half of what happened during the global financial crisis of 2008/2009.

RBNZ data show banks had $352.4 billion worth of housing loans outstanding at the end of March and  $1.76b of this total was non-performing.

Impaired loans stood at 300 at the end of March.

The non-performing figure for residential housing loans is 0.5%, which is low compared to lending in other sectors – 1.7% of agricultural loans and just over 1% of commercial property loans.

Data given to the RBNZ by the four biggest banks show that the non-performing share is somewhat higher for lending already on higher mortgage rates, highlighting the link between debt servicing costs and borrower cash flow pressures.

A small proportion of mortgage borrowers hasn't been able to manage higher interest costs. Difficulty in keeping up with payments has been made worse by cost-of-living pressures and unforeseen events like job losses.

As a result, an increasing share of mortgage lending has been categorised as non-performing (defined as those 90 or more days in arrears or impaired).

This share has increased from 0.2% percent in 2022, a low level, to about 0.5%.

The RBNZ also monitors the share of lending that is 30 days or more past due as a leading indicator of future non-performing loans. That share has also gradually increased to slightly above the 2020 peak.

A similar trend can be seen in the share of mortgage lending categorised as in hardship, where borrowers have suffered unforeseen circumstances and had to change their debt repayments to meet their obligations.

Households that borrowed heavily relative to their incomes are particularly strained by rising interest costs.

Centrix data show that rates of financial hardship are highest amongst those aged 30 to 50, who also tend to have larger loans. Specifically, 44% of hardships relate to mortgage payment difficulties.

However, residential mortgages reported in arrears improved slightly in March to 1.48%, down from 1.51% in February, according to Centrix.

There are now 22,100 mortgage accounts past due, down from 500 in February, which is up 13% year-on-year.

While some borrowers are struggling, the RBNZ’s report shows the vast majority of borrowers are coping with higher interest rates.

Most borrowers have moved off the low fixed mortgage rates that were locked in two to three years ago onto much higher rates. Only about 10% of mortgage lending remains at fixed rates below 4%.

Adapting

As a result, the average rate across the stock of lending is about 85% of the way to its projected peak. This rate has increased to 6% from a low of 2.8% in 2021.

The RBNZ says it will likely continue to increase to about 6.5% percent at the end of this year based on the forward path of interest rates implied by market pricing.

Mortgage borrowers have had to adapt to the higher interest costs.

Retail spending volumes have declined since early 2022 despite strong net immigration.

Households have limited their discretionary spending. In addition, some borrowers have reduced principal repayments, which is an option available to borrowers who have paid off principal faster than required.

Housing activity

Housing market activity remains weak as high interest rates have reduced borrowing capacity and investor demand.

House prices have increased slowly over the past year following an earlier decline and remain within the RBNZ’s estimated sustainable range.

Introducing restrictions on debt-to-income ratios will help manage housing-related risks to the financial system, the RBNZ says.

While LVR restrictions are mainly aimed at improving the resilience of the financial system by reducing potential losses if borrowers default on their mortgages, the DTI tool aims to improve borrower resilience by reducing the probability of borrowers defaulting.

Given these tools have synergies in mitigating losses for the financial system, restricting DTI ratios will allow for more permissive LVR settings while achieving a similar level of overall resilience.

By activating DTI restrictions when the market is relatively subdued, it is likely they will not be binding initially for most borrowers. Instead, DTI restrictions are intended to protect against increases in risky lending, especially when interest rates decline.