More fallout from the subprime mortgage debacle in the United States is expected to surface in New Zealand's economy as bank loans get more expensive - prompting consumers to scrutinise ownership of luxury assets.
With many mortgages recently reset from 7% two or three years ago to beyond 9%, household budgets are already feeling the pinch from the extra costs of lending passed on by banks.
Higher rates have sprung from the increasing global credit crunch, brought on by the exposure and losses of banks worldwide to the high-risk and complex subprime sector, making all banks and investors risk averse.
As banks tighten their lending belts, New Zealand consumers are expected to assess the viability and returns on assets such as rental properties, holiday homes and boats.
Despite banks booking an increase in total assets of 16% and net profitability of 10% for 2006-07, the swiftness of the subprime effects had seen banks shift from targeting asset growth to focusing on funding and liquidity, financial advisory firm KPMG said in its 2007 Financial Institutions Performance Survey of registered banks, released yesterday.
KPMG deputy chairman Godfrey Boyce said banks were placing greater emphasis on attracting domestic funding, noting that more than 30% of their balance-sheet funding came from overseas.
"New Zealand banks are generally struggling to source medium to long-term funding and when they can it's at very much higher interest rates,'' he said.
If domestic conditions in New Zealand worsened and there was no improvement with the offshore funding, New Zealand banks could be further constrained and a credit rationing scenario develop, Mr Boyce said.
Because of the element of offshore funding required by New Zealand banks, the country would be forced to "take its own share of the subprime mortgage medicine'', he said.
Business cases for loans would have to be "watertight'' and there would be very little discretion available to bank officers to vary terms and conditions of loans.
Mr Boyce said it was inevitable there would be an impact on the economy because the same level of finance would not be available to consumers.
"A much more likely response to the mortgage rate hikes is homeowners selling their boat or bach,'' he said.
Because of the higher interest rates, holiday or rental properties, or boats, were more likely to fall victim and be put up for sale than family homes be put up for mortgagee sale.
Rental property investors, facing static rental income and slow capital growth, would be pushed to sell some property, Mr Boyce said.
