1. Mortgage lending is slowly thawing out
NZ’s mortgage lending environment is showing early signs of a recovery in overall loan activity (from a low base). First-home buyers are still dominating in the low-deposit lending segment, and there continues to be a lack of mortgage repayment stress – despite the rapid rises in interest rates over the last 2½ years or so. It’s also worth noting that the total value of existing mortgages at present is $354 billion, with our overall property stock estimated at $1585 billion. At least on paper, there’s a lot of equity out there.
But we shouldn’t get complacent. After all, 54% of current loans are fixed but due to see a rate repricing within the next 12 months – typically onto a much higher number. Indeed, the Reserve Bank estimates that the average fixed rate currently being paid by existing borrowers is around 5.3%, versus prevailing market rates of more than 7%. This repricing process has been smooth so far, but it’ll remain a key theme in 2024, especially if we did start to see a few job losses here and there.
It was also interesting to see commentary last week from the Reserve Bank about their possible implementation plan for debt-to-income ratios (DTIs). Nothing yet on a potential date or where the caps might be set – but it was certainly worth noting the point made that DTIs might not do much straightaway (which we’ve also been banging on about for a while now), due to the role already being played by high mortgage rates in limiting so-called risky lending. In other words, DTIs are about restraining the “next cycle”, when mortgage rates do eventually fall again.
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2. Short fixes are still the most popular
In another, related dataset from the Reserve Bank last week, we saw that 72% of new lending in October (across house purchases, bank switches, and top-ups) was fixed for up to two years (in October 2021, that was only 56%). For much of the second half of this year the prevailing view has been that mortgage rates have peaked or are close enough to peak, so it stands to reason that borrowers would prefer shorter fixes – which offer some repayment certainty, but also reduced risk of over-paying should interest rates fall a bit more quickly than anticipated over the medium term.
CoreLogic chief economist Kelvin Davidson: "Debt-to-income ratios are about restraining the 'next cycle', when mortgage rates do eventually fall again." Photo / Peter Meecham
3. More bad news likely for tenants
On Wednesday this week, Stats NZ will publish the rent price data for November, and unfortunately for tenants it’s likely to show another fairly strong increase (October’s figure of 6.1% from a year earlier was near to a record high). The reasons for this aren’t hard to find: rising wages, strong migration/population growth and relatively tight availability of properties to lease.
4. Net migration remains a key focus
Speaking of migration, we get the next update (October data) from Stats NZ on Tuesday, and although it can’t keep setting new records forever, there seems a decent chance that net inflows of people to NZ have stayed high. And even if the figures do start to weaken a bit soon, there’s no getting around the fact that we’ve already got 119,000 (net) extra migrants than this time last year.
5. Still no recession?
And just finally, Stats NZ will publish the Q3 GDP figures on Thursday, which may well show a quarterly rise of something like 0.3-0.5%. Of course, even if the economy managed to grow a bit in Q3, that’s old news, and more recent data has been a little more concerning. The next 12 months could be patchy for overall economic performance, which is another reason for housing caution.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
