Financial pressure: Fewer people borrowing, more missed debt payments

Demand for loans and credit cards has fallen while those getting behind on their payments for existing debt is on the rise, data from credit agency Centrix shows.

Keith McLaughlin, managing director of Centrix, said the crunch of Omicron and looming inflation had started to have a tangible impact on Kiwi consumers’ confidence.

“Overall demand for consumer credit is down 6 per cent year-on-year, along with average credit scores dropping three points during the past month.”

Home loan demand has been particularly impacted with mortgage applications down 12 per cent and credit card demand down 35 per cent year-on-year.

Demand for personal loan applications was also down, falling 8 per cent, although demand for auto finance continued to be strong.

McLaughlin said his agency had never seen demand for credit cards fall so fast.

“I think it is a combination of factors, certainly it’s buy now, pay later – I think that has had an impact on it. I also think inflation is having an impact because people are being more conservative in their approach to spending.”

He said there had been a decline in demand for credit cards for some time but it had been exacerbated now.

McLaughlin said mortgage applications had not recovered since the changes were brought in to tighten the Credit Contracts and Consumer Finance Act in December.

The Government has since announced some tweaks although those don’t come into force until June.

“Even then some of the anecdotal information I am getting from our credit providers is they have set their systems up and spent a lot of money doing that and they are not just going to throw them out.”

McLaughlin said arrears were also increasing across the board, as Kiwis begin to struggle with making repayments in the face of the rising cost of living.

“It is just a lack of money to go around really. If the grocery bill goes up and the petrol bill goes up there is less money left in the pocket.”

Arrears were up 5 per cent year-on-year in March 2022 driven by increasing late payments in personal loans, buy now, pay later accounts and telecommunication payment plans.

He said historically the level of arrears had been higher but there had been a decline in arrears and defaults in the last three or four years.

“We are now starting to see a reversal of that. You wouldn’t want it to be a prolonged decline.”

McLaughlin said if inflation was a short-term issue then the problem could self-correct but if it dragged on and incomes did not keep up with outgoings then the problem would be exacerbated.

Arrears on personal loans had risen to 9 per cent – the highest level since May 2020 – while arrears on buy now, pay later accounts had risen sharply to the highest level since March 2020.

“Personal loans and credit cards are not secured and people will always pay their mortgages before they will pay their one-off loan.”

But interest rates on personal loans and credit cards were higher than they were on mortgages so the impact of missed payments could be quite severe.

The value of new mortgage lending was down 30 per cent in March compared to the prior year although it remained above the March 2020 new lending amount.

But it also found more borrowers were taking out the debt over 30 years. That was up from 48 per cent in 2018 to 57 per cent of new mortgages issued in 2022.

Mortgage arrears rates had also begun to rise – an early sign of increasing financial hardship and a potential sign of future trouble.

McLaughlin said he did not expect to see mortgagee sales to rise for some time.

“Generally speaking there is enough equity in the property for an orderly sale, although if properties start to stay on the market longer and arrears blow out because people can’t liquidate their properties then you don’t know what will happen…”

But he said the banks wanted to work with borrowers so any mortgagee sales would likely be a last resort.

Small business recovery

While demand for debt from business remained down 7 per cent year on year in April there had been a decrease in credit defaults with the retail and hospitality sectors showing signs of recovery.

In retail trade, defaults were down 10 per cent in March from the prior month and were down 5 per cent for hospitality.

“Hopefully that trend will continue, which will create a bit of activity in the economy.”

But both agriculture and tourism were facing the strongest headwinds as labour
shortages, supply chain disruptions and rising costs continued to be a challenge.

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