New Zealanders are missing payments on their buy-now-pay-later debts at a rapid rate, and there has been an uptick in "early-stage arrears" on mortgages as economic conditions in the country tighten.
It has been 18 months since the official cash rate in New Zealand started to climb from its low of 0.25 per cent throughout the early years of the pandemic.
Now, households are approaching a fixed-rate cliff. And in a similar move to the Reserve Bank of Australia, New Zealand's central bank decided to lift rates at its last meeting to a degree that many analysts did not expect.
The impact of these conditions, as well as a period of high inflation, on New Zealand households is now apparent.
The managing director of debt monitoring bureau Centrix, Keith McLaughlin, said arrears on payments across all sectors had been increasing for the past eight months.
"It started off with the buy-now-pay-later sector, then moved on to the personal loans and credit cards, then auto finance started going into arrears," he said.
"Then more recently, we've seen a climb in home loan arrears, so I think Kiwis started to feel the pinch really about eight months ago and it's just been slowly getting tighter and tighter as interest rates have gone up, along with cost of living."
Households are having to decide which bills to pay and which can wait, and historically the mortgage has been the priority because borrowers have so much to lose.
But repayments on unsecured lending, where there is no asset to be seized by the lender, are more likely to be missed by households under pressure.
The chief economist at ANZ New Zealand, Sharon Zollner, said it made sense then that buy-now-pay-later payments were the first to go, but the current conditions in New Zealand were "the first serious test" for the consumer credit services.
"It is a new type of lending and, because of its nature and the very light credit checks around it, what we're seeing is not surprising," she said.
"I would say there is a fair bit of uncertainty about where that might end up."
Infometrics chief economist Brad Olsen noted demand for buy-now-pay-later loans was also down.
"You're seeing a falling rate in the demand for it, which is encouraging, but the much higher rate of arrears also says that those who are currently still stuck with it are a lot more challenged and compromised," he said.
"It suggests that there are definitely some people in society that are still more at risk and that risk is unlikely to go away."
In March, 11.3 per cent of all New Zealanders who had a line of credit were behind in their payments, whether that was for their phone, utilities, car or personal loan or for the mortgage on their home.
"When you look at New Zealand marketplace, and this is across the board, there's 427,000 Kiwis who are in arrears with some type of credit facility and it's climbing every month, so the trend to me is the worrying thing," Mr McLaughlin said.
Home loan arrears at pre-pandemic levels
The Centrix data on all household debts was released as the New Zealand Reserve Bank (RBNZ) published its Financial Stability Report, which takes stock of how borrowers are faring.
The report noted: "Early-stage arrears — missed payments by a borrower of one to three months — have been increasing in recent months, and are currently back to where they were before the pandemic."
"Compared to the Global Financial Crisis, these indicators so far remain low.
"Rates of non-performing mortgages and the number of mortgagee sales are also low, albeit growing."
The official cash rate in New Zealand has jumped 5 percentage points at an unprecedented rate, but the country has also seen wages increase over the past two years and a strong labour market, meaning most households should be able to weather the budget storm.
Mr Olsen said while the level of mortgage stress was moderate, the speed at which some families had been thrust into this position was a factor.
"There is still a lot of resilience in the market housing space when it comes to people who are able to still afford their loans," he said.
"People aren't happy, there is certainly more stress creeping into the system, but we're not seeing any sort of catastrophic failure."
Now, 1.3 per cent of New Zealand mortgages — nearly 20,000 home loans — are reported as being behind by at least one payment.
Ms Zollner said this was a return to pre-pandemic levels of mortgage stress.
"Yes, it's risen, generally just to normal levels, so the levels that were prevailing before the COVID period," she said.
"I'd say it's a case of so far, so good on the whole, but that said, it is early days."
There is a notable difference between the Australian and New Zealand mortgage markets: Across the Tasman, the number of borrowers on fixed rates is much higher.
"In New Zealand, only about 10 per cent of mortgage debt is floating (or variable). So quite a lot of people are yet to roll over onto the latest effective mortgage rates of around 4.5 per cent," Ms Zollner said.
"In its Financial Stability Report, the reserve bank forecast [the effective mortgage rate] to be a bit over 6 per cent by the end of the year. So, it's coming."
Recent first home buyers beyond test rates
In the report, the RBNZ said it expected "most borrowers will be able to continue to service their debt obligations without significant stress".
But there is one group most likely to be currently struggling to meet its mortgage repayments.
"[There are] households that borrowed during the period of very low interest rates between late 2020 and late 2021, [and] current interest rates exceed some of the test rates used by banks during this period," the Financial Stability Report read.
"Therefore, some of these borrowers and other borrowers with high debt-to-income levels may begin to struggle to meet their repayment obligations as they reprice onto the higher rates."
Of all current mortgages in New Zealand, about 25 per cent originated in 2021, "with about a fifth of this being to first home buyers".
"Those are the people that will be most stressed out by the increase in interest rates," Ms Zollner said.
On Tuesday, the RBA shocked analysts by raising Australia's official cash rate by another 0.25 of a percentage point, bringing it to 3.85 per cent and marking the 11th increase in the space of a year.
The Reserve Bank of New Zealand does not meet every month like the RBA, instead making decisions about the country's official cash rate seven times a year.
And with more of the mortgaged population on fixed rates, any changes to interest rates typically take a lot longer to be felt.
"New Zealand household debt relative to GDP is about 98 per cent, which is getting up there, but in Australia, it's 123 per cent, so Australian households have a lot more debt," Ms Zollner said.
"That plus the high floating proportion of debt means the RBA gets a lot of traction very fast and I think that goes a long way to explaining why the RBNZ has been feeling much more urgency to get rates up fast."
NZ rates likely to rise again
The RBNZ will meet again on May 24, with analysts now of the view the official cash rate in New Zealand will rise again.
"Infometrics are still picking a further 25 basis point increase (0.25 of a percentage point) to the official cash rates," Mr Olsen said.
"There was some speculation certainly in the financial markets, certainly from some economic forecasters, that the reserve bank could or should be done with interest rate hikes, given that headline inflation came in softer than expected in the March quarter.
"The labour market data though shows that the unemployment rate remains low, wage growth has intensified further and with all of that, we're still thinking that there's enough pressure in the system that we're not fully on top of the various pressures on the economy, [so] in our minds, the reserve bank won't want to send a signal of moderation anytime soon."
Ms Zollner said: "Although we are well into the hiking cycle, and logically we must be closer to the end of that, there still could be some surprises."
She said "just because central banks pause, they're not going to promise" to not start raising rates once again.
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