Most borrowers are opting for short-term fixes, which will mean the effect of falling interest rates would be felt relatively quickly, property economist Kelvin Davidson says. Photo: RNZ / Nate McKinnon
Interest rates may be falling - and relatively quickly - but that does not mean the end of New Zealand's mortgage stress, Corelogic is warning.
Property economist Kelvin Davidson said the percentage of "non-performing" loans, which are at least 90 days overdue or considered impaired, had lifted to 0.6 percent of all mortgages.
That was the highest level in a decade.
Davidson said while it was only about half the rate of 2009 and 2010, it was a concern and could continue to rise because unemployment was increasing.
"Based on Reserve Bank figures, the trading banks themselves recently seem to have been raising provisions for possible future 'bad' housing loans, to the point where these allowances are now about 40 percent above even the largest Covid-era figure.
"Mortgage stress will remain a factor to watch for some time to come yet and is another reason to be cautious about the size and strength of any upturn in house sales and prices as we head into 2025."
He said while the numbers were not "off the charts" they were definitely rising.
They tended to be a lagging indicator, he said, because borrowers did everything they could to avoid not paying their loans.
He said most borrowers were opting for short fixes, which would mean the effect of falling interest rates would be felt relatively quickly.
"In December last year, for example, 36 percent of new loans (by value) were taken out for a fixed term of up to 12 months.
"But that had spiked to 56 percent by February and reached a new record high of 68 percent in August - driven by an especially large surge in six-month activity, off the back of that first OCR cut.
"Our analysis suggests that existing borrowers who are rolling over their loans onto a new fixed rate will have been behaving in a very similar way to new borrowers, and indeed the Reserve Bank's figures show that the share of existing loans that are currently fixed but due to change mortgage rates within the next 12 months has now risen back to around 66 percent - matching a peak previously seen in the first half of 2021... Some of that stock growth will have also come from all of those recent new borrowers who have been fixing short too."
He said, overall, those short mid-2021 fixes were probably not the best decision.
A five-year rate was on average 4 percent in May 2021, according to Reserve Bank data.
Anyone who fixed then could still have 18 months on what would look like "ultra low rates" now, he said.
"On the other hand, one can understand why borrowers are now choosing to take shorter fixed periods in the hope they will benefit from a series of loan renewals in the coming year or two at ever-lower rates."
He said, for the first time since mid 2021, people who had fixed for a year were now rolling off on to lower interest rates.
"Much like it wasn't necessarily an easy decision to decide on the 'best' fixed rate back in mid-2021 - although it's clearer in hindsight what should have happened, it's not necessarily straight-forward now either.
"After all, the very short-term rates (such as six months at 6.7 percent) remain quite a bit higher than the slightly longer terms (12 months at 6.2 percent) - so for the strategy of taking two consecutive six-month fixes to pay off, that rate basically needs to drop to 5.7 percent or less by April next year.
"Could that happen? Nothing's out of the question, especially given the continued weakness of the economy and an emerging risk that inflation falls much more sharply than has been anticipated; which would likely see the OCR also fall more rapidly, alongside extra downward pressure on mortgage rates.
"But at the same time, there could also be a sense at the moment that some of the potential future falls in the OCR have already been captured by current mortgage rates, meaning that the scope for more declines from here, regardless of the fixed term, could be a bit slower/smaller than what we've seen to date.
"Either way, the delicate decisions currently faced by mortgage borrowers may continue for a while yet."
He said it could make sense for borrowers to have loans split and fixed across a range of terms.
"I have heard some people are now taking a mix of six months, 12 months, 18 months and hoping to spread the terms and always having something coming up for renewal so they can take advantage of rates as they go down."