The mother of all mortgage hangovers could come

It now seems like an all too real possibility that the big, all night house party of 2020-21 will give way to the mother of all mortgage hangovers in 2022.

I fully expected mortgage rates to rise this year. But I was blown away by how quickly they rose.

To be clear from the start, I don’t see much of a chance that rising mortgage rates will result in people being evicted from their homes.

But I think there is an increasing chance that there could be a pretty steep decline in spending, likely in the second quarter of next year.

And that has to be observed.

Yes, we know the economy was stronger than expected. And the job market was hot as a hot thing.

However, these things can swing around pretty quickly.

I remember commenting in May that the Reserve Bank had given the ‘go’ signal so that the financial markets begin to drive interest rates high. The RBNZ did so by doing something as simple as reinstating the forward forecast of the Official Cash Rate – and showed that OCR will go up very significantly over the next three years.

The reaction was strong enough that I was concerned about the possibility of ‘stagflation’ in July.

All of this happened while the RBNZ itself didn’t have to do much physically. Keep in mind that at the time of writing it had only increased its OCR to 0.5% from 0.25% (but is expected to have more as of Wednesday November 24th).

However, the markets just keep going. With thanks to the ASB economists, here is their table on the development of wholesale prices (as of Monday of this week):

My word for it is, “Wow.”

The above numbers are, in a nutshell, the reason mortgage rates are crying out forwards. For example, the popular two-year fixed “special rate” rose on average from around 2.5% in the middle of the year to 4.35%.

Apart from a few brief (quickly reversed) spikes in 2010 and 2014, we haven’t had a rising interest rate environment since the mid-2000s.

What was interesting about the experience was the battle the Reserve Bank had against homeowners with fixed mortgage rates.

In 2007, the RBNZ squeezed the OCR until it was blue on the face and drove it to the now seemingly unthinkable 8.25%.

But the interesting thing to note is that the RBNZ has now been discontinued ‘S8’ mortgage loan Statistics, is that less than half, actually less than 40%, of the outstanding mortgage funds at this point (in the example of September 2007) had to be reset / re-priced within a year. So nothing the RBNZ did could “hurt” those who paid the mortgage for at least 12 months. They were impenetrable.

This time it’s completely different.

The RBNZs current ‘S33’ series The time to next revaluation shows that in September, the last available month, over 70% of outstanding mortgage funds (valued at nearly $ 230 billion) should be revalued within 12 months. In fact, over a quarter of the mortgage money (just under $ 90 billion) was due for repayment within THREE months – that is, before the end of the year.

This means that any mortgage rate changes that are made now will “pop” for the money very quickly. Change tariff today, pain tomorrow – or not so many days later.

It is worth looking at a few examples to get a feel for what is ahead of us.

Let’s use our old favorites, first-time homebuyers.

Two theoretical examples, one of the resetting of a two-year fixed-rate mortgage (30-year term) in November 2019 and the other of a one-year fixed-rate mortgage (again 30-year term) in November 2020.

The RBNZs Lending by borrower type numbers tell us that as of November 2019, the average loan for the FHBs for that month was $ 440,500. Based on Average of the new special mortgage rates then a fixed interest rate for two years could have been 3.44%. With the faithful Mortgage calculator from gives monthly payments of $ 1963.

Fast forward two years and given the newly emerging two-year average interest rate of 4.35%, let’s take the somewhat benevolent view that maybe $ 20,000 of the principal has been paid off, with $ 420,500 outstanding and monthly payments down by $ 130 (per month ) rise) to 2093 US dollars.

For the FHB, the situation will be a little worse from November 2020. The average mortgage loan at the time was $ 498,000. The one-year fixed interest rate (average) was 2.53%. Now it’s about 3.65%. Using the same calculations (and subtracting $ 10,000 for principal repayment), our monthly FHB payments are $ 1975 as of November 2020 and increase to $ 2,232 as of this month – an increase of $ 257 per month.

Now none of these examples will break the bank, or rather the FHB – but the increases are of an order of magnitude that will certainly be felt.

As everyone knows, you pay the roof over your head bill before paying anything else. And if it costs more to keep that roof over your head, then other things are missing out, discretionary things.

So the obvious areas of spending that could fall by the wayside are things like eating out and impulse buying. And it’s this kind of drop in spending that could really start to bite the economy.

As I said at the beginning, the situation needs to be monitored very closely.

Personally, I don’t have a good feeling about that at all.

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