Have your say: how much are tougher bank lending applications and rising interest rates affecting you?

The new rules apply to all new loan applications and increases to existing lending, such as applications to fund renovations to an existing property or increase a credit-card limit. Industry figures say borrowing will become significantly harder for first-home buyers, older borrowers and business owners.

YIJU believes the Reserve Bank’s recent OCR increases, tighter DTI settings and other measures demonstrate the government’s determination to intensify its crackdown on property speculators and restore stability to the housing market. So how has the market responded? The latest data from Auckland’s largest real estate agency, Barfoot & Thompson, shows that although the number of properties listed for auction has recently risen rapidly, auction clearance rates have declined steadily for 6 consecutive weeks.

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16–22 October: 68%

23–29 October: 67%

30 October–5 November: 62%

6–12 November: 59%

13–19 November: 54%

20–26 November: 50%

Many investors say, ‘These clearance rates are no surprise. They are the inevitable result of banks rapidly raising lending rates over a short period and the Reserve Bank’s crackdown.’ So how much are continuing increases in the official cash rate (OCR) and banks’ mortgage rates affecting our lives? Before readers share their views, let us see what two well-known local economic commentators have to say.

David Hargreaves believes rising bank mortgage rates will not force most people out of their homes. Instead, he sees growing opportunities, given that New Zealand’s economy and labour market are performing much better than previously forecast. ‘Undeniably, we have seen two-year fixed “special” mortgage rates rise from around 2.5% in the middle of this year to 4.35%. Apart from a few brief episodes in 2010 and 2014, we have not seen rates rise this quickly since the mid-2000s. In 2007, the Reserve Bank of New Zealand tightened the OCR to the extreme, pushing it to what now seems an incredible 8.25%! Interestingly, however, its now-discontinued “S8” mortgage statistics show that at the time—taking September 2007 as an example—less than half of outstanding mortgages, indeed less than 40%, were due to reset or reprice within a year. In practice, therefore, nothing the Reserve Bank did could “hurt” borrowers whose fixed mortgage terms extended beyond 12 months. In other words, most mortgage borrowers would be unaffected.’

‘This time, things are very different. The Reserve Bank of New Zealand’s current “S33” series shows the time until the next repricing. As at September, more than 70% of outstanding mortgages, worth nearly NZ$230,000,000,000, were due to reprice within 12 months. In fact, more than a quarter of mortgages, worth just under NZ$90,000,000,000, would reprice within three months—by the end of 2021. That means any change in mortgage rates now will quickly have a real financial impact. “Today’s interest-rate change is tomorrow’s pain” is no exaggeration.’

As YIJU has analysed in earlier articles, rising mortgage rates will hit first-home buyers’ pockets first. This makes it easy to understand in YIJU’s article of 26 November (click to read), why Reserve Bank Governor Adrian Orr advised first-home buyers to ‘wait a little longer and see what happens to interest rates!’

Consider two first-home buyers whose mortgage rates are resetting: one took out a two-year fixed mortgage in November 2019 with a 30-year loan term; the other took out a one-year fixed mortgage in November 2020, also with a 30-year term.

Buyer 1: Reserve Bank lending data shows that in November 2019, the average first-home buyer loan was NZ$440,500. At the average two-year fixed special rate of 3.44% at the time, monthly repayments were NZ$1963. Two years later, the new average two-year rate is 4.35%. Assuming NZ$20,000 in principal has been repaid, leaving a loan of NZ$420,500, monthly repayments will rise by NZ$130 to NZ$2093.

Buyer 2: According to Reserve Bank data, the average first-home buyer loan in November 2020 was NZ$498,000, at an average one-year fixed rate of 2.53%. The current average one-year rate is 3.65%. Using the same calculation, assuming NZ$10,000 in principal has been repaid, first-home buyer 2 will see monthly repayments rise from NZ$1975 in November 2020 by NZ$257 to NZ$2232.

Summary: Based on the figures analysed above, neither first-home buyer would be pushed into bankruptcy by the interest-rate increase. However, the increase in mortgage repayments would certainly put some pressure on their living costs.

New Zealand Herald business editor Liam Dann, meanwhile, believes rising interest rates are not necessarily a bad thing. He argues they can effectively control inflation and cool the housing market, while putting New Zealand back on a path towards historically normal interest rates. ‘Recently, the Reserve Bank raised the official cash rate for the second time in two months, this time to 0.75%, and forecast at least 7 further increases! This would bring the OCR to around 2.5% by mid-2023. At current margins, that could mean a return to mortgage rates of 6%. Traditionally, local property developers would be among those most vulnerable to interest-rate increases. But the government does not want to stop this development boom, particularly when it is already addressing the housing shortage. In economic terms, stable policy and a level playing field enable people to plan and create more wealth. That is the real purpose of the government’s economic policies.’

‘Some economists believe the projected path of interest-rate increases is optimistic, and that economic growth will slow before rates peak. Many will worry about inflation, about needing to raise rates faster, and about the prospect of a New Zealand property-market crash. This year, we have already seen how vulnerable China’s market is in the face of a property-sector collapse. New Zealand’s economy therefore needs sensible adjustment through economic measures, and we will depend more than ever on monetary policy to stimulate growth.’ As for rising mortgage rates, he says plainly that he would welcome them.