NZ mortgage payments to drop by $3b in the next year: Macquarie

“While not a game changer, it is a notable positive for the NZ consumer and the broader macro outlook,” Macquarie said.

The research house said that after a trip here it thinks the New Zealand economic recovery “is clearly lagging expectations” and that the mantra has changed from “survive til 25” into “it’ll be fixed in 26.”

“While we came away confident of a recovery, we felt the timing remains uncertain given cautious consumers.”

The Reserve Bank has cut its official cash rate by 225 basis points to 3.75% since August last year but only about 45bp of that has fed into mortgage rates, Macquarie said.

It noted the housing market remains soft with prices flatlining and the greatest factor holding the market back is a lack of job and income security as rising unemployment and public service job cuts weigh on sentiment.

“This suggests that rate cuts alone may not be enough to drive a housing recovery. Indeed, bank volume growth expectations were subdued with lenders only expecting an increase to 4% to 5% from 3% now.”

The unemployment rate has climbed from 3.3% in the September quarter of 2022 to 5.1% in the March quarter of this year – RBNZ has forecast it will peak at 5.2% in the June and September quarters of this year before slowly declining again.

Maquarie expects banks’ “backbook” fixed rates will drop another 100bp from about 6% to about 5% over the next year, but said there is some potential for further falls from future rate cuts and additional competition.

It notes that mortgage advisers was that competition currently is focused on cashbacks rather than interest rates, but its view is that repricing activity will put pressure on bank margins.

“Feedback from banks and brokers was that they were all preparing for this flow (ie staffing up teams), which suggests a risk of increased competition ahead.”

It saw the government-owned Kiwibank as “the challenger bank,” noting that since 2019 it has grown its mortgage book by 52% compared with banking system growth of 36%.

Although Kiwibank has only about an 8% market share, it has been writing between 15% and 20% of new mortgage growth.

“Feedback from mortgage brokers on Kiwibank was positive, noting that they were the lender to watch and that once their tech transformation is complete (they’re about five years into an about eight year programme), they would likely be the market leader on technology.”

Macquarie said that although Kiwibank operates with a similar net interest margin to the four major banks, its return on equity (ROE) is “materially lower.”
RBNZ figures showed Kiwibank’s ROE in the March quarter was 6.7% while the big four banks’ ROE ranged from Westpac’s 9.5% to ANZ’s 14.2%.

Macquarie said the banks have been surprised by the resilience of credit quality over the past few years, “especially considering the quite severe recession.”

With the outlook being for the economy to improve, that experience “has left banks with greater risk appetite.”