Subj : Household borrowing at 'strained' levels, warns Reserve Bank
To   : All
From : News
Date : Wed May 01 2024 01:37 pm

The Reserve Bank has issued a stark warning as homeowners increasingly fall
into mortgage strife - with the number predicted to increase by the end of
this year.

People aged between 30 and 50 were at the most risk, the central bank said.

The Reserve Bank released its six-monthly Financial Stability Report this
morning.

Stats NZ also this morning adjusted the unemployment rate to 4.3% in the
March quarter, compared to the previous 4%. The seasonally adjusted
unemployment rate rose 0.9 percentage points, up from 3.4% in the March 2023
quarter.

The Reserve Bank report pointed out the financial system remained strong as
high interest rates continued to dominate the economy.

But households that borrowed heavily relative to their incomes were
"particularly strained" by rising interest costs and a small proportion of
borrowers had not been able to manage higher costs, it said.

"Difficulty in keeping up with payments has likely been made worse by
cost-of-living pressures and other unforeseen events like job losses."

An increasing share of lending had now been characterised as non-performing -
increased from 0.2% in 2022 to around 0.5%. But that expected to move to 0.7%
by the end of the year.

The number of non-performing loans - those that were 90 or more days in
arrears - had reached about half of what it was during the Global Financial
Crisis.

There had also been a small rise in arrears in lending that was 30 days or
more past its due date - an indicator of worse to come.

The Reserve Bank report also noted most borrowers have moved off the low
fixed mortgage rates that were locked in two or three years ago and were on
much higher rates - with the majority of people on rates between 6.5% and 7%.

Only around 10% of lending remained on fixed rates below 4%.

Deepening debt to be felt over time
Debt was expected to rise as the rest of people move on to those higher
rates. "The impact of higher debt servicing costs is also often only fully
realised after some time, as a strained borrower exhausts savings and other
buffers."

Banks say people were handling those costs through reducing repayments or
drawing on savings buffers. While the number of interest-only mortgages had
remained flat at historically low levels, that was an option.

People who borrowed heavily relative to their incomes were facing the
toughest time. Centrix data showed the rates of financial hardship were
highest amongst those aged between 30 and 50, who tended to have larger loans.

There was more bad news on the horizon. Rising unemployment meant people
could face increasing amounts of debt.

Banks too faced risks. About 60% of their lending was made up of mortgages,
so any losses were likely to affect profitability.

And business failures were increasing, as they hit high interest rates,
insurance and operating costs and consumer spending fell through the floor.

Inflation was declining and the housing market remained weak because high
interest rates have reduced borrowing capacity and investor demand.

The Reserve Bank was consulting on Debt to Income Ratios, which would help
protect against risky mortgage lending.

Insurance costs were becoming an increasing issue too, with some households
faced with skyrocketing bills, or finding themselves unable to be insured.
The Reserve Bank has released a special paper on insurance pressures.

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