Reserve Bank warns Kiwi mortgage holders are particularly exposed to interest rate changes

Reserve Bank: For every $100 of disposable income New Zealand households have, they have about $170 of debt. Photo / Mark Mitchell

The Reserve Bank of New Zealand (RBNZ) says the country’s financial system “appears robust and in a good position to face potentially looming challenges”.

The regulator recognises the system’s vulnerabilities stem from mortgage holders being very exposed to high interest rates.

This is because elevated house prices mean Kiwi borrowers are particularly highly indebted by international standards. They also tend to fix their debt at short durations, meaning interest rate changes are felt more acutely.

The RBNZ notes that overall, mortgage holders are meeting their repayment obligations and the banking system is in a much better state than it was during the 2009 Global Financial Crisis.

However, problems could arise if unemployment shoots up or financial conditions tighten.

For every $100 of disposable income New Zealand households have, they have about $170 of debt.

The ratio is similar in Canada, but worse in Australia, where households have nearly $200 of debt for every $100 of disposable income.

In the United Kingdom, Europe and the United States, households have about $100 to $130 of debt for every $100 of disposable income.

The RBNZ included these figures in a chapter of its biannual Financial Stability Report, which it released on Monday, ahead of the document being published in full on Wednesday morning.

The point the RBNZ sought to draw attention to is that while it’s wary of the impact high interest rates are having on mortgage holders, New Zealand’s financial system is faring similarly to other advanced countries.

“To date, financial systems have been largely resilient to risks emanating from higher interest rates, but the full impact is still to be seen and some areas of concern are emerging,” the RBNZ said.

Mortgage holders are significant, as mortgage debt makes up 63 per cent of the $551 billion of loans on issue by New Zealand-registered banks.

Turning to other parts of the financial system, the RBNZ noted that while the New Zealand equity market did well during the initial stages of the pandemic, it has since become an underperformer by international standards.

The RBNZ said this partly reflects the higher weighting of interest rate-sensitive sectors in the NZX50 index relative to many overseas indices.

“US equity markets have been buoyed by the strong performance of the technology sector and stronger than anticipated economic activity. European equity markets have profited recently from declining energy prices that increased corporate profits,” the RBNZ said.

It recognised that both here and abroad the commercial property sector faces “considerable headwinds”.

“Higher interest rates and lower demand from tenants, caused by more workers choosing to work from home, have lowered asset valuations and worsened property owners’ loan servicing ability,” the RBNZ said.

“Funding is also becoming more constrained due to tighter lending standards. In the future, decreasing operating margins for property owners and growing difficulties refinancing loans are likely to raise the share of debt past due for repayment.”

The RBNZ recognised New Zealand banks aren’t as exposed to commercial property as US banks are.

Furthermore, risks to the financial system have been mitigated by tight lending standards.

“So far signs of financial stress have been limited,” the RBNZ said.

Looking at the big picture, the RBNZ said, key financial stress indicators remain “mostly benign compared to expectations, although some areas of stress are emerging”.

“In part, this reflects robust macroeconomic fundamentals, such as low unemployment rates, and past regulatory tightening across many jurisdictions after the GFC,” it said.

“The channels through which higher interest rates impact economies are generally the same, but the impact and transmission speed vary across markets, countries and time.

“Risks to financial stability will likely be most acute in countries with weakening economic fundamentals.”

Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.