Today’s figures from the Reserve Bank (RBNZ) showed a small fall in the value of mortgage lending in March, reflecting fewer loans (but not a fall in the average size of each loan). Meanwhile, the banks continue to operate well below the LVR speed limits, with only 12.5% of lending to owner-occupiers done at >80% LVRs in March, versus the speed limit of 20%. The scrapping of capital gains tax proposals and the prospect of a cut in the official cash rate could help to support the market in the coming months.
CoreLogic Senior Property Economist Kelvin Davidson writes:
There are three key points from today’s mortgage lending statistics. First, the value of lending dropped year-on-year – it was a small fall, but still the first since March last year. Second, the number of loans is soft, but each loan on average is bigger. And third, banks are still operating well below the LVR speed limits. For those that can pass the deposit, income/expense and serviceability testing hurdles, the competition amongst banks and ‘rate wars’ are still making it a great time to be a borrower.
Looking at the actual numbers, there was $5.77bn of mortgage lending in March, down slightly (about $80m) from $5.85bn a year ago. The figure for owner-occupiers was up by more than $180m from a year ago, so the overall drop was driven solely by investors (see the first chart).
By borrower type, first home buyers (FHBs) with less than a 20% deposit (or >80% LVR) remain a key group in the market, with lending up by 43% year-on-year in March (see the second chart). Larger average loan sizes have played a key role here – about $461,000 in March, compared to about $430,000 a year ago (see the third chart). On a 25-year mortgage at a 4% interest rate, that equates to an extra $75 per fortnight in repayments.
Despite the growth in the high LVR segment, the speed limits are not yet within sight. In March, 12.5% of lending to owner occupiers was at >80% LVR, well below the cap of 20%. Past experience suggests that this figure could push up to about 15% – which would help to provide support for lending flows in the coming months – before flattening off and the banks keeping the ‘extra 5%’ as a safe buffer.
In addition to all of that, there’s a couple of related points to note from the past month. First, there’s the surprise indication from the Reserve Bank that the next move in the official cash rate (OCR) could be down in the near term rather than up in the long term. Although that may not directly lower mortgage rates itself, it does raise the chances that they’ll stay at current levels (favourable for borrowers) for longer. After all, independent of OCR speculation, the lending environment is already competitive and ‘rate wars’ have re-emerged (see the fourth chart).
Second, the prospect of a broad-based capital gains tax (CGT) has been scrapped, which may bring back a few would-be property investors to the market who had previously been on the sidelines as they waited to see the outcome of the CGT debate. Of course, that effect may not be huge, given that on the other hand, the tax ring-fence for rental property losses is passing through parliament and will apply to the current tax year.
All in all, March was a slightly softer month for lending activity, but it was hardly a disaster, and there are signs that growth could resume again in the next few months. That may not bring about a big rise in sales volumes or property values, but it should at least help to keep them relatively stable.