Business / Economy

More mortgage defaults likely with higher unemployment - RBNZ

11:35 am on 5 November 2024
  • RBNZ report says financial system resilient despite downturn
  • Economic challenges remain, many households under pressure
  • Higher unemployment likely to lead to higher mortgage defaults
  • Debt costs near peak, to decline further as rates fall

The Reservie Bank said rising unemployment was affecting more households, making it more difficult to service loans. Photo: RNZ

A weak economy, rising unemployment, and still high debt levels are likely to result in more lending defaults although the financial sector is strong enough to cope with the shocks, according to a new Reserve Bank report.

The RBNZ six-monthly financial stability report (FSR) said weakness in the domestic economy was more "pronounced", which has led to reduced consumer spending and business investment.

"High debt-servicing costs continue to squeeze household budgets," the report said.

Unemployment and bad debts rising

It said rising unemployment was affecting more households, making it more difficult to service loans and causing higher levels of bad debt.

"Banks have reported to us that many highly indebted households have little incomes or savings buffers available. This makes them vulnerable to unanticipated costs or losses of income."

"With debt-servicing costs generally remaining high for now, rising unemployment is likely to cause more borrowers to default on their mortgage payments over the next 6 months."

However, the report said mortgage rates appeared to have peaked, debt servicing costs were dropping as interest rates fall, and defaults were below levels in the Global Financial Crisis and at manageable levels for banks.

The RBNZ estimated about 50 percent of fixed mortgages would reprice to lower rates in the next six months, and 75 percent within a year.

However, in a pre-released part of the FSR it said the risks of another housing boom, as seen during the pandemic, were less.

Severe recession key risk

The RBNZ report assesses the risk to the banking and finance sector from various domestic and global shocks and how strong the system is to withstand such shocks.

It said the current key risk for the system was a severe recession, and banks had done stress-testing to assess how well prepared they were to cope with political and trade disruptions, natural disasters, and an outbreak of foot and mouth disease.

The FSR said banks' strong profits, increased financial reserves, and reduced reliance on overseas borrowing had improved their ability to cope with shocks.

The RBNZ said it was working to improve the resilience of the financial system through such measures as the deposit guarantee scheme, as well as improving competition in the sector.

The RBNZ financial stability report can be read here