Recent house buyers at elevated levels face higher mortgages costs as rates rise.
New Zealand’s banks have improved their capital positions over the last two years but some home buyers who purchased during the recent “buying frenzy” will be challenged by higher interest rates, according to Reserve Bank of New Zealand Governor Adrian Orr on Wednesday.
Responding to questions after releasing the central bank’s latest Financial Stability Report, Orr said that the despite “no shortage of warnings” from the RBNZ, many people had taken out large mortgages at elevated house price levels and would now be faced with the prospect of “belt tightening,” See: MNI INTERVIEW: NZ Risks Hard Landing, Ex-RBNZ Official.
NZ house prices surged by an average of just under 30% in 2021 but have fallen back so far this year as interest rates have risen, and as the RBNZ has raised official rates from 0.25% to 1.5% since October. The report acknowledged that a large correction to the housing market remained a possibility, and that recent buyers with limited equity were “particularly vulnerable” to house price declines.
“Some recent mortgage borrowers could face difficulty servicing their debts as interest rates rise alongside higher living costs,” the report said.
Overall, however, the report said that the NZ financial system “remains well placed to support the economy” and that higher capital requirements for banks made the sector more resilient. “This strengthens the banking sector’s ability to absorb losses and maintain lending in the event of a downturn,” the report said.