No debt-to-income ratios until mid-2024?

1. Playing the waiting game with debt-to-income ratios

I always thought that last week’s Financial Stability Report (FSR) from the Reserve Bank of New Zealand would be one of two extremes: either the normal, run-of-the-mill commentary on where the financial system stands and the risks it faces, or a much more intriguing announcement of a new system for capping the amount of debt that mortgage borrowers can have in relation to their income (DTIs). In the event, it was the former. DTIs are still ticking away in the background, with the Reserve Bank looking to consult again early next year, but they wouldn’t be in place until mid-2024 or later.

Of course, even though the FSR proved to be “boring”, that’s good news when it comes to the financial system and housing market. As the report noted, it seems inevitable that mortgage repayment problems will rise in the coming months as more borrowers reprice from older, lower fixed rates and onto the current, higher levels – especially if employment falls. But on the positive side, the repricing process has been well managed so far, and non-performing loans and mortgagee sales are starting from very low bases.

2. Labour market softer in Q3

Speaking of employment, it was perhaps a bit more concerning that Stats NZ reported a drop in the third quarter, which contributed to a rise in the unemployment rate (even despite a lower participation rate, or reduced supply of workers) from 3.6% to 3.9% – the highest since the middle of 2021. However, without wanting to talk up the data too much, it does need to be acknowledged that sub-4% unemployment is still very low, and there’s even a bit of suspicion that the drop in employment was a statistical blip that could be revised/reversed in the coming quarters. On balance, yes, the labour market is softening, and that’s another reason to be cautious about the possible speed of any housing market upturn, but it’s far from a full-blown collapse.

And of course, in happier news for anyone with a large mortgage to service, the rise in the unemployment rate gives the same message as the drop in CPI inflation in Q3: that the Official Cash Rate (OCR) doesn’t need to rise on November 29, and actually may not be pushed up again at all in this cycle. Of course, other factors matter for mortgage rates, such as banks’ wholesale funding costs overseas. But a flat OCR is still better news for borrowers than an increase!

3. The housing downturn is officially over

In amongst those key data releases last week, we also published the CoreLogic House Price Index for October, which showed a 0.4% rise in national average property values – the first in 18 months, closing off the downturn at a total drop of around 13% from peak to trough. But with affordability still stretched and mortgage rates unlikely to fall anytime soon (as well as the labour market showing signs of slowing down), it seems fair to suggest that this upturn will be slow rather than stellar.

CoreLogic chief economist Kelvin Davidson: "A flat OCR is still better news for borrowers than an increase." Photo / Peter Meecham

4. Recession fears are easing

The combined message from last week’s ANZ business confidence measure (up strongly) and the NZ Activity Index (implying a small rise in GDP for Q3) is that, for now at least, we’ve probably kicked the start of a recession down the road a bit. That’s good news for those wanting the property market to recover on a more sustained basis (which isn’t everybody!), but given heightened global uncertainty at present, a possible recession could hover around for a while yet.

5. The most popular fixes

It’s quieter for new data releases this week, but later today the Reserve Bank will publish its breakdown of mortgage lending in September, based on the loan terms chosen by people buying houses, topping up, or switching banks. Lately, the shorter-term fixes have become even more popular again, as longer-term rates have become a bit less competitive. Probably more of the same in September – giving people some degree of certainty, but also a reduced risk of over-paying later, if and when mortgage rates do eventually start to fall again.

- Kelvin Davidson is chief economist at property insights firm CoreLogic