start to notice a difference, and with further increases in the OCR projected for this year, servicing a mortgage is set to get tougher for most households, ANZ economists say.
Last year, the Reserve Bank of New Zealand (RBNZ) lifted the OCR, from the record low of 0.25 per cent to 0.75 per cent. Meanwhile experts project this rate to be increased by another 25 basis points to 1 per cent during this week’s monetary policy statement, and it will not be the last increase this cycle. Economists at ANZ expects the OCR to be hiked to as much as 3 per cent by April 2023, provided the economy evolves as anticipated.
Such increases in the cash rate mean hikes in the cost of mortgage debt for most people. According to ANZ chief economist Sharon Zollner, in most instances, there are many highly leveraged households which struggle even in the face of moderate increases in rates. This is particularly owing to interruption in incomes, although it has been further exacerbated by consumer prices pressures. The historically high inflation of 6 per cent is now making a meaningful dent in cash flow buffers of households, Zollner noted.
Considering the impact of OCR hikes on mortgage serviceability of households, as ANZ projects the OCR to reach 3 per cent by April next year, debt servicing as a share of income is expected to lift from record low of 5 per cent in late 2021, to about 8 per cent by the end of 2023. “A key take-out of our central forecast, which assumes 5 per cent household income growth, is that the debt burden on households will intensify over the next two years. But this is from a very low starting point and will plateau at a relatively low level,” Zollner said.
According to experts, recent first-home buyers are expected to feel the pinch the most. A recent analysis by RBNZ shows that a 5 per cent increase in mortgage rates, would lead to a serviceability stress among 20 per cent of recent first-home buyers, while at 6 per cent, it would rise to nearly 50 per cent. “Some first-home buyers inherited or were gifted their deposit, and don’t have particularly high incomes,” the ANZ chief economist pointed out. “Households in this situation, and possibly those with incomes from the likes of hospitality and tourism, will have a harder time of it over coming years.”
