RBNZ warns rising interest rates could test resilience of NZ economy

Highlights

• The Reserve Bank of New Zealand released its Financial Stability Report today (2 November).
• The report states that even though the economy has been resilient, downside risks persist.
• High mortgages and rising debt servicing costs could lead to some imbalances in the economy.

The Reserve Bank of New Zealand (RBNZ) released its latest report on New Zealand’s financial stability today (2 November 2022)

The report states that the rising interest rates would lead to further increases in lending rates for households and businesses and this can lead to a slowdown in New Zealand’s economy.

The governor of the RBNZ Adrian Orr said that the rising global interest rates needed to curb inflation would test NZ’s financial resilience.

For that, he stated that the financial institutions have a role to play while supporting their customers and allocating credit to them.

Falling house prices

As per the report, one of the significant developments in New Zealand’s economy is the decline of house prices, which have fallen 11% from their peak in November 2021.  In Auckland and Wellington, they have fallen by 15% and 18%, respectively.

However, despite the fall, the prices remain at sustainable levels, according to the report.

However, the decline in prices means that some borrowers who bought houses in 2021 are now in negative equity.

The Reserve Bank said that even though negative equity and mortgage arrears were not widespread at the moment, they could potentially grow if prices continued to fall and mortgages rose due to increasing interest rates.  In this context, the report highlighted that while currently only  2% of mortgage lending was in negative equity, it could rise to around 7% if the house prices fell a further 10%.

Negative equity, the RBNZ said, increases the chances of a default by the borrowers. This could mean losses for the lenders (banks).

House construction slowdown

The RBNZ in its financial stability report also warned that housebuilding activity is likely to slow down due to falling prices, a rise in the cost of construction, and rising interest rates.

Businesses

The report said that New Zealand businesses continue to face a difficult operating environment but the overall profitability of New Zealand businesses remains healthy as most companies have been able to preserve their profit margins.

Business lending has so far been resilient but in the coming days it could feel the pinch as well.