The value of mortgage lending to investors in June was again lower than a year ago, with the LVR speed limits appearing to have a significant role in the slowdown. Indeed, the first batch of investor lending data at the 70% LVR cap was also released today (with the rule actually changed back on 1st January, up from 65%), and it showed still-low activity. On the plus side, at least partly due to the lending rules, mortgagee sales across NZ are very low – only 38 in Q2 2019, the lowest for more than 15 years.

CoreLogic Senior Property Economist Kelvin Davidson writes:

Mortgage lending activity is in a see-saw pattern from month to month at present, with a drop in March followed by a rise in April, a drop in May, and now a rise in June. Indeed, today’s figures from the Reserve Bank (RBNZ) showed lending of $5.44bn in June, up by $136m from a year ago. Owner-occupiers continued to borrow more than last year, but investors less (see the first chart).

Annual change in lending, $m (Source: RBNZ)

Within the owner-occupier category, first home buyers (FHBs) are growing the most quickly (see the second chart). This is a similar message to what the CoreLogic Buyer Classification series is currently showing; that FHBs’ % market share of property purchases is as high as its been at any point in the past 15 years or so.

Annual change in lending, % in past 12 months compared to previous 12 months (Source: RBNZ)

For investors, in many ways it’s not surprising that borrowing activity has cooled over the past 6-9 months. For a start, gross rental yields are already relatively low and the appeal of property investment has taken a further hit from a range of new government-driven costs (such as extra insulation). Moreover, the investor LVR rule (i.e. a speed limit of no more than 5% of lending at >70% LVR) has been pretty restrictive, especially because a self-imposed 5% buffer at the banks may well mean that the effective speed limit for high LVR investor lending is zero.

On this point, it was interesting to get the first release today of investor lending stats at that ‘new’ LVR speed limit (recall that it was changed from a 65% to 70% LVR cap on 1st January, but the need to build up a back series meant that the figures have only been published for the first time today). And as the third chart shows, only 0.5% of lending to investors was at >70% LVR in June. Note also that lending to owner-occupiers at >80% LVR also remains well below the 20% speed limit.

Proportion of lending at high LVRs (Source: RBNZ)

Looking ahead, the prospective cut in the official cash rate that looms on 7th August (at the next Monetary Policy Statement) may provide a short term boost to lending activity, while there’s also potentially two further important milestones in November – another possible cash rate cut on 13th November, and a further loosening of the LVR rules on 27th November (in the Financial Stability Report). For now, there are a number of possibilities for how the LVR rules might be changed, but our hunch is that the owner-occupier speed limit will rise from 20% to 25%, and for investors it will rise from 5% to 10% (rather than changing the deposit requirements). Whatever happens in November, however, the LVR rules do seem to be playing an important (and stabilising) role in the housing market, with the number of mortgagee sales currently very low (see the fourth chart).

NZ mortgagee sales per quarter (Source: CoreLogic)

So overall, today’s lending figures add to other evidence (e.g. cooling growth in property values) of a general slowdown in the housing market. The rest of 2019 looks ‘slow and steady’, and then a key factor for 2020 will be how the banks may need to adjust to the new capital requirements that could be imposed by the RBNZ from April next year.