Monday, February 16, 2004
Housing market teetering on a debt mountain
The residential property market in New Zealand is close to sinking under the weight of its own mortgage debt, according to an article in today's Dominion Post.
Reserve Bank figures show that mortgage debt has ballooned in the past two years, from $67.9 billion in December 2001 to $86b at the end of 2003. If New Zealanders keep borrowing at the same rate, total mortgage debt will exceed $100b in 12 months.
That is leading to concerns that many households are so loaded with debt that even a small rise in interest rates or reduction in their disposable income could mean they struggle to meet repayments.
At the time of the 2001 Census, the average mortgage would have been $145,500. Now it's around $179,800, and if total mortgage debt hits $100b, the size of the average mortgage is likely to have increased to about $203,000.
Some economists are picking interest rates to exceed 8.5 per cent by year's end. New Zealand's total annual mortgage repayment bill could therefore pass $10b this time next year. That is almost as much as the country earned from the export of meat, fish and dairy products ($10.4b) in the year to June 2003. And because the banks source most of their mortgage funding from offshore, most of the repayments are sent back to the overseas lenders who provided the funds.
According to Deutsche Bank chief economist Ulf Schoefisch, the housing market is now in a more precarious position than it was prior to the last property slump in the late 1990s, because debt levels are much higher now. Rates may have to go only to 8% for people to feel the pain.
What could be the result?
The most obvious is a rush to downgrade housing to an affordable mortgage level. That might be easier said than done, though, if the purchasers are not there for the expensive properties (so far, the top end has been very buoyant, particularly with overseas buyers looking for what to them are bargains. But the immigration bubble has burst somewhat -- if a bubble can partially burst!! -- and that looks a bit fragile, too.) It will put a lot more pressure on mid-range housing stock, and therefore push the prices of these properties up.
A less obvious result will be huge strain on marriages, as couples have to change their lifestyle significantly.
The residential property market in New Zealand is close to sinking under the weight of its own mortgage debt, according to an article in today's Dominion Post.
Reserve Bank figures show that mortgage debt has ballooned in the past two years, from $67.9 billion in December 2001 to $86b at the end of 2003. If New Zealanders keep borrowing at the same rate, total mortgage debt will exceed $100b in 12 months.
That is leading to concerns that many households are so loaded with debt that even a small rise in interest rates or reduction in their disposable income could mean they struggle to meet repayments.
At the time of the 2001 Census, the average mortgage would have been $145,500. Now it's around $179,800, and if total mortgage debt hits $100b, the size of the average mortgage is likely to have increased to about $203,000.
Some economists are picking interest rates to exceed 8.5 per cent by year's end. New Zealand's total annual mortgage repayment bill could therefore pass $10b this time next year. That is almost as much as the country earned from the export of meat, fish and dairy products ($10.4b) in the year to June 2003. And because the banks source most of their mortgage funding from offshore, most of the repayments are sent back to the overseas lenders who provided the funds.
According to Deutsche Bank chief economist Ulf Schoefisch, the housing market is now in a more precarious position than it was prior to the last property slump in the late 1990s, because debt levels are much higher now. Rates may have to go only to 8% for people to feel the pain.
What could be the result?
The most obvious is a rush to downgrade housing to an affordable mortgage level. That might be easier said than done, though, if the purchasers are not there for the expensive properties (so far, the top end has been very buoyant, particularly with overseas buyers looking for what to them are bargains. But the immigration bubble has burst somewhat -- if a bubble can partially burst!! -- and that looks a bit fragile, too.) It will put a lot more pressure on mid-range housing stock, and therefore push the prices of these properties up.
A less obvious result will be huge strain on marriages, as couples have to change their lifestyle significantly.
