Even a moderate slide in house prices would lead banks to re-calculate the mortgage interest rates of some homeowners next time they refixed their loans.
A global recession warning has been sounded, and New Zealand is holding its breath to see whether it impacts asset values on the home front.
But banks charge lower “special” interest rates on home loans where the borrower has more than 20 per cent equity in their home, and a slide in prices would result in any homeowners slipping below that level facing higher mortgage rates.
“They would say you don’t qualify for the special rates,” mortgage broker Karen Tatterson from Loan Market said.
* Why the silence over unfair urban mega-mortgages?
* Debt lessons from a young woman who drowned in debt
* Recession warning flashes for first time since financial crisis, stocks plunge
ASB’s current 2-year fixed rate for people with more than 20 per cent equity in their homes was 3.69 per cent compared to 4.19 per cent for people with less less than 20 per cent equity.
The last time New Zealand homes fell significantly in value was in the aftermath of the global financial crisis, when property prices slumped in New Zealand by 10 per cent before recovering.
That would mean they got no benefit from the Reserve Bank’s cut to the Official Cash Rate taking it down to 1 per cent.
Each month about $500 million of new home loans with deposits of less than 20 per cent are issued by banks.
New Zealand had suffered few property price falls in modern times, according to Ashley Church, former chief executive of the Property Institute of New Zealand.
The largest was a 38 per cent fall between 1975 and 1980, he said, which followed modern New Zealand’s first residential property boom.
Church is not expecting a house price crash in New Zealand.
“The history tells us that in the last couple of cycles, even in periods of immense upheaval, the impact was about 10 per cent,” Church said.
He believed New Zealanders weathered property downturns well, and did not succumb to the panic that appeared to take hold in some overseas markets.
Places which experienced huge price drops like some US cities, and Ireland, had their own special conditions that contributed to such large falls, he said.
Affordable homes campaigner Hugh Pavletich believed “multiple stretch” where young homebuyers borrowed far in excess of three and a half times their gross incomes had exposed many to risk.
“The bigger the stretch, the bigger the the problem.”
The Reserve Bank of New Zealand began tracking debt-to-income (DTI) ratios on new home loans this week.
In Auckland, almost half of new first home buyer home loans were issued in July at a DTI of over five.
Of the $420 million in new home loans issued in Auckland in June $204m was at a DTI multiple of five or more times buyers’ before-tax income.
Reserve Bank limitations on the amount of bank lending to people with less than 20 per cent deposits had reduced the proportion of recent homebuyers at risk of negative equity.
Negative equity is when a borrower owes more to the bank than their home is worth.
The Reserve Bank estimated that at the end of May that fewer than one in 100 Auckland homes on which there was a mortgage were in negative equity, though the figure did not include a deduction for real estate fees.
At the end of June, it estimated that if the property market fell by 10 per cent, just under 3 per cent of mortgage debt would be owed by households in negative equity.
A drop of 15 per cent would see that rise to just under 5 per cent, and a 20 per cent fall would see that rise to just over 7 per cent of mortgage debt.