Rising interest rates in New Zealand will cause house prices to fall, which will hurt Australian banks’ lending income
But a perfect storm of issues means that Australian banks’ kiwi boost may be coming to an end.
While the magnitude of the real estate boom may be similar on either side of the Tasmanian Sea, the New Zealand real estate market differs in that 85 percent of its mortgages are sold at fixed rates, typically for a two-year term.
And that will make for an interesting time.
Borrowing capacity reached
Sproules says 40 percent of Kiwi mortgages will be refinanced over the next six months and 70 percent over the next 12 months. But with the recent rate hikes by the Reserve Bank of New Zealand and higher bond yields, fixed mortgage rates have risen higher.
That means many borrowers will move from fixed rates of about 2.6 percent to fixed rates of about 4.6 percent, which, according to Sproules, will have two important implications.
The first is that higher interest rates coupled with actions by the RBNZ to increase the home loan performance buffers (as the regulator did here) will hurt lending capacity, with Sproules predicting that lending capacity could fall by as much as 22 percent .
Second, higher mortgage costs result in housing devouring a greater proportion of household income; Citi believes some households could cut their spending by 20 percent.
The result could have a heavy blow on house prices.
“House prices rose more than 25 percent as mortgage rates fell about 200 basis points, so we expect an appropriate response when rates rise. So it’s not unthinkable to assume that house prices could fall 25 percent if mortgage rates reverse the 200 basis point COVID-related decline, ”says Sproules
Rising interest rates will of course help bank revenues. However, since the big four banks have more borrowing than deposits, Sproules says, borrowing income could be impacted before deposit income increases.
Should the Sproules disaster affect the Kiwi apartments, it will be yet another headwind for a banking sector facing persistent, persistent pressures on profits from persistent costs and weak growth.