Worsening housing affordability presents an increased risk of mortgage defaults in New Zealand, according to credit rating agency Moody’s Investor Services.
In a new report on covered bonds issued by NZ banks, Moody’s says it expects housing affordability will remain significantly worse than the average for the last 10 years, “which is credit negative for residential mortgage covered bonds we rate in New Zealand.”
The report said rising interest rates meant the mortgage payments on new mortgages taken out in August this year would eat up an average of 39.1% of average household income, up from 35.4% a year earlier.
In Auckland, new borrowers required an average of 47.1% of average household income to meet their mortgage payments.
“In every region, the share of household income to meet mortgage repayments was worse than the region’s average for the past 10 years,” the report said.
“Rising interest rates, which are the main cause of poor housing affordability, will increase the risk of delinquency for outstanding loan pool mortgages.”
For the NZ covered bonds we rate, which the country’s five largest banks issue, most outstanding mortgages are fixed rate loans.
“However, the fixed terms for 70% to 80% of these mortgages will end in the next two years.
“When fixed terms end, borrowers will have to fix their loans for a further period or switch to floating rate mortgages.
“Either way, interest rates will be higher than current rates for outstanding mortgages.”
The report said Auckland’s poor housing affordability was a particular risk for NZ covered bonds because 46.1% of cover pool mortgages were for properties located in the city.
A breakdown of the cover pool mortgages by the five major banks showed that ASB was the most exposed to the Auckland market at 58%, followed by ANZ 47%, BNZ 43%, Westpac 40% and Kiwibank 39%.
Moody’s said it expects interest rates to keep rising this year, however their effect on housing affordability and the risk of mortgage defaults would be mitigated by falling house prices.
“We expect New Zealand house prices will continue to decline over the rest of this year and into 2023 as rising interest rates and high inflation weigh on property market sentiment,” the report said.
“House price declines will likely offset rising interest rates,” it said.
Covered bonds are debt securities through which the bondholders have both an unsecured claim over the issuing bank and hold a secured interest over a specific pool of assets set aside by the issuing bank known as the cover pool. NZ banks’ cover pools consist of residential mortgages. if the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders.
