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Examining the ‘Mortgage Bomb’ Phenomenon: Fact or Fiction?
Is the Story as Explosive as Headlines Suggest?
Recent reports have highlighted concerns surrounding a potential ‘mortgage bomb’ that could have widespread implications for borrowers unable to meet their repayment obligations. However, it is essential to delve deeper into the situation and assess whether the situation is truly as alarming as some headlines portray.
Lisa Owen, on RNZ National’s Checkpoint, raised an important question last Monday, asking listeners if they could find an additional $1600 per month in their household budget if necessary. She emphasized that this figure solely represented mortgage payments and underlined the cost of living crisis faced by certain Aucklanders, supported by new data from Westpac.
During 2020 and 2021, many mortgages were fixed at significantly lower interest rates, approximately half of the rates currently available. This phenomenon, referred to as ‘The Great Refixing’ by Lisa Owen, may lead to substantial increases in monthly repayments, impacting not only Auckland residents but also borrowers nationwide.
A recent survey highlighted by Newsroom suggested that approximately 3 percent of mortgage-holders may face the genuine risk of being compelled to sell their properties within the next year. According to the survey conducted by research firm Horizon, this would mean around 42,000 home loans could be in jeopardy.
Additionally, BusinessDesk reported that 70 percent of respondents to the same survey expressed concerns about their ability to afford mortgage payments when renewing at current or higher interest rates.
In June, Nicola Willis, the National Party deputy leader and finance spokesperson, issued a warning about an imminent “mortgage bomb” that could have far-reaching repercussions, potentially affecting the entire economy. Former National Party press secretary Janet Wilson echoed these concerns in her column, referring to it as “mortgage Armageddon” with an increasing number of individuals falling behind on their payments.
However, it is crucial to consider various perspectives and expert opinions on the matter. Satish Ranchhod from Westpac, speaking on Checkpoint, explained that most mortgage applicants during the pandemic were assessed based on rates closer to the current levels. He further emphasized that the economy remains in good shape, and people still have some financial buffers to protect them from the impact of rising mortgage costs and other living expenses.
ANZ Bank chief executive Antonia Watson shared a similar sentiment, stating on Newstalk ZB that although signs of stress are evident, the situation remains manageable. Watson highlighted that individuals are receiving pay raises, and significant numbers of home loans are well ahead of their repayment schedules, reflecting improved savings habits and debt reduction.
While concerns persist, it is important to note that mortgagee sales are generally considered a last resort. In April, ANZ’s Watson mentioned that discussing mortgagee sales was premature, and currently, only 38 properties nationwide were advertised as residential mortgagee sales. This is a far cry from the over 3000 mortgagee sales observed during the global financial crisis in 2009.
Furthermore, interest.co.nz reported that the proportion of home loans in arrears in May was lower than the 1.5 percent recorded at the beginning of March 2021. Banks are motivated to downplay the risk of defaults and highlight the assistance programs available to borrowers facing payment challenges.
In May, a statement from Nicola Willis indicated that 430,000 New Zealanders were behind on debt repayments, including mortgages, car loans, and credit cards. This figure had been increasing for eight consecutive months, according to monthly data from credit reporting agency Centrix.
Bloomberg also reported on missed mortgage payments in New Zealand, citing Centrix data and noting a significant increase in the number of individuals falling behind on their mortgage payments in the past seven months. However, Westpac attributed the rise in customers seeking financial support to Cyclone Gabrielle in February, and Kiwibank did not observe a significant rise in consumers requiring assistance.
Centrix’s April data indicated a decrease in the number of individuals behind on their payments, down to 411,000, which was considered encouraging and suggested that households were adjusting their borrowing and spending patterns.
According to senior business journalist Miriam Bell of Stuff, around one-third of New Zealand households have mortgages, with approximately a quarter of current lending originating in 2021. About half of these mortgages are due for refinancing within the next 12 months. However, not all borrowers will transition from super low rates to significantly higher rates simultaneously.
Approximately 10 percent of mortgages are on floating rates, and several customers at ASB have already transitioned to higher rates over the past 18 months. Other banks do not possess precise information on the share of mortgages due for refinancing in the coming months or 11 months from now, as interest rates may potentially ease by then.
BNZ reported that less than half a percent of its mortgages were in arrears for 90 days or more, significantly lower than the average of 1.9 percent recorded in March 2020.
However, it is worth noting that different reports and opinions exist on the subject. Bernard Hickey, in his newsletter The Kaka, criticized the notion of a mortgage bomb, deeming it “reckless.” He expressed skepticism regarding the Horizon survey’s credibility, considering it an opt-in survey that might not accurately reflect reality. Hickey also found Centrix’s data, indicating nearly $5 billion worth of overdue mortgages, to be significantly misaligned with official figures.
Hickey emphasized that forced property sales, typically associated with such crises, have not been widespread, and incomes have been rising. He also noted that banks have been cautious in lending to those who may struggle with increased payments. Hickey suggested that those most vulnerable might be individuals who took risks by investing in properties they do not currently reside in. He drew a parallel to the government not bailing out individuals who borrowed money to buy shares.
Hickey concluded that property is viewed differently by politicians, as indicated by the prime minister’s recent dismissal of a Capital Gains Tax proposal. This decision may further incentivize people to invest in housing, potentially leading to larger mortgages and, subsequently, higher repayments that could strain affordability.