Most mortgage borrowers have now moved onto higher interest rates with some "doing it tough" and spending less to make ends meet, according to the latest Reserve Bank Financial Stability Report.
In its 6-monthly assessment of the financial system, the Reserve Bank says most people expect lower interest rates in major economies later this year but the timing is uncertain given high inflation might still persist.
High interest rates have meant house prices have remained relatively stable and while the number of borrowers behind on their mortgage payments has picked up, it is from a low level.
"To date, the impacts of higher interest rates on the financial system have been more benign than generally expected," said the Reserve Bank.
Only around 10 percent of mortgage lending remains on fixed rates below 4 percent, with the average mortgage sitting on around 6 percent, up from a low of 2.8 percent just three years ago.
The higher rates mean retail trading has dropped as people limit their discretionary spending. The report references data from credit agency Centrix which shows financial hardship is highest among those aged 30 to 50.
More borrowers are expected to fall behind on payments, with banks indicating that this will increase to 0.7% of their lending, which is around half of what it was during the Global Financial Crisis. Businesses are also doing it tougher due to subdued demand, with company failures rising from low levels.
This was backed up by the latest Centrix data which shows that overall company liquidations have reached a nine-year high in March this year, with over 230 companies placed into liquidation.
"One in four were from the construction sector, highlighting the ongoing struggle the sector faces as housing projects stall due to tight finances," Centrix Managing Director Keith McLaughlin said.
Despite this, Deputy Reserve Bank Governor Christian Hawkesby said New Zealand's financial system remains strong as it continues to adjust to the higher interest rate environment.
"Banks’ capital ratios have increased ahead of higher future requirements and liquidity positions remain strong, " says Hawkesby. "The financial system remains well placed to handle a range of severe scenarios."
