New Zealand households more exposed to mortgage defaults
Highly-indebted households with large mortgages and little savings buffers face increasing risk of defaulting on their loans, the pre-release of the Reserve Bank’s November Financial Stability Report says.
Tuesday, October 31st 2023, 9:23AM
by Sally Lindsay
Due out tomorrow, an article within the report – An International Perspective on the Financial Stability Implications of Higher Interest Rates – says countries where households have elevated levels of debt-to-disposable income are particularly vulnerable due to higher interest rates.
Borrowers in countries with a large share of mortgages on shorter fixed terms such as New Zealand and Australia are experiencing substantially higher debt servicing costs, putting strain on household budgets, it says.
While the world’s advanced economies’ financial systems have been largely resilient to risks arising from higher interest rates so far, the full impact is still to be seen and some areas of concern are emerging.
“Globally core inflation remains high and central banks are expected to keep monetary policy tight for some time,” Kerry Watt, Reserve Bank financial stability assessment and strategy director says.
Despite most mortgage debt having rolled over to higher interest rates already, signs of household stress remain muted in New Zealand, bolstered by high employment.
While there are challenges caused by rising interest rates, there are few signs of widespread debt servicing stress in advanced economies, he says.
“Non-performing loan (NPL) ratios remain well below levels seen during the Global Financial Crisis (GFC) and banks’ capital and liquidity positions have risen markedly in all advanced economies since then,” Watt says.
NPL ratios in New Zealand and Canada are particularly low compared both to other economies and their historic levels. Nevertheless, Watt says NPLs and loan arrears are increasing slightly in most countries, including New Zealand. In most advanced economies banks have reacted to expectations of deteriorating credit quality by increasing provisions for bad debts.
In countries with a larger share of longer-term fixed-rate mortgages, such as the US and parts of central Europe, higher policy rates pass through more slowly into mortgage rates, so risks may not have fully materialised yet.
Watt says while few signs of systemic stress from the household sector have emerged so far, the outlook remains uncertain, particularly in countries with a high percentage of mortgage holders.
However, the Reserve Bank says financial institutions are continuing to show widespread resilience to higher interest rates in all major advanced economies. 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.
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.
Key downside risks to global financial stability are potentially weakening labour markets and persistently high inflation rates, raising the risk of further policy tightening.
An international comparison shows New Zealand’s financial system is faced with similar challenges as other countries but appears robust and in a good position to face potentially looming challenges.
An area of relative weakness for New Zealand, like Australia and Canada, is the exposure of mortgage borrowers to higher interest rates given high household debt levels and shorter fixed-term mortgage rates.
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