Activity breakdown by LVR the most interesting, economist says
Mortgage lending activity rose for the first time in two years, and will likely increase further, along with property sales volumes and house prices, though it might still be fairly subdued by past standards, according to a CoreLogic analysis of Reserve Bank data.
The latest RBNZ data showed mortgage lending activity was $5.8 billion, a $0.4bn increase from a year ago and the first annual lift in lending volumes since August 2021.
Kelvin Davidson, CoreLogic NZ chief economist, said a breakdown of the figures showed owner-occupiers borrowed more last month than the same period in 2022, but investors were on par with a year ago.
“That softer performance from investors is hardly surprising, given the cash-flow pressures on an investment purchase that are currently arising from low gross rental yields and high mortgage rates,” Davidson said.
“Meanwhile, interest-only lending remains ‘under control’, with about 36% of loans to investors in August being done on this basis (compared to a cyclical peak of 46% in July/August last year) and a figure of only about 14% for owner-occupiers, compared to around 20% a year ago.”
But perhaps the most interesting cut of these figures, he noted, was the breakdown by LVR.
“Lending to investors who don’t have the required 35% deposit (unless going new build) remains almost non-existent,” he said. “By contrast, given the relaxation of the LVR rules from 1st June, the past few months have shown a sharp rise in the share of lending to investors with a 35-40% deposit – a group precluded by the previous LVR settings.”
Percentage of lending at high LVR
RBNZ data showed overall investor lending flows remained subdued and so did their purchasing activity in the market.
“In other words, those investors borrowing with a 35-40% deposit (or 60-65% LVR) may be topping up existing loans or switching banks, rather than actively buying more properties,” Davidson said.
Low-deposit lending to owner-occupiers, too, has lifted lately, from around 6% of activity in May to the current 8-9% – a figure still lower than the new 15% speed limit but was the highest share since late 2021.
“In turn, a high share (around 75%) of those low-deposit flows for owner-occupiers is actually absorbed by first-home buyers,” Davidson said.
High LVR lending to first-home buyers
The latest RBNZ data also included a breakdown covering loan purpose, which showed that top-ups and bank switches have remained relatively stable in the past few months, but with house purchase loans showing early signs of an upturn.
“Overall, then, it’s early days, but the latest mortgage lending figures add to other evidence that the housing market downturn has (all but) ended, helped in part by the loosening of the LVR rules from 1st June, and also relaxed CCCFA rules one month prior to that,” Davidson said.
“However, we’re cautious about the speed and scale of any near-term rebound in property sales, lending volumes, or house prices. After all, mortgage rates aren’t likely to fall significantly anytime soon (maybe not for at least another year) and the serviceability test rates certainly remain a key hurdle for many would-be borrowers at present.”
Davidson said that indeed, high mortgage rates have lately been a key limiting factor in the size of loan in relation to incomes, “given they restrict how much debt that can actually be serviced from a given wage.”
Percentage of lending at DTI >7
That said, Davidson said CoreLogic believes there’s a “reasonable chance” that RBNZ will impose formal caps on debt-to-income ratios next year.
“To be fair, given that high DTI lending has already fallen, formal caps may not actually do much straightaway,” he said. “But if imposed, they’d mean the RBNZ is already ‘ahead of the curve’ for when interest rates do eventually fall again and possible financial stability risks from larger new mortgages re-emerge.
“In the long run, DTIs would tend to tie house prices more closely to incomes (which grow slower than the historical rate of house price inflation we’ve seen in NZ over the past 20-30 years), and also limit the number of properties that anybody can own until there’s been sufficient time (maybe five to seven years) for their incomes to grow enough to allow the next purchase.”
View the CoreLogic report here.
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