After the enforced break for most mortgage lending activity in April, a rebound was always going to be seen in May – and activity did indeed recover last month, but perhaps not as strongly as might have been expected. Given the favourable conditions for borrowers (e.g. banking sector competition and ultra-low mortgage rates), mortgage activity should track along steadily for the next month or two, but the winding up of wage subsidies and mortgage payment deferrals are likely to be key tests for the property market as we hit Spring and the final few months of 2020.

After the 50% year-on-year fall in new mortgage lending activity in April – or in other words alert level four lockdown – interest around May’s figures was always going to be on the strength of the rebound. Today’s data confirmed that activity did indeed recover a bit in May, although it was still lower than ‘normal’.

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

The latest Reserve Bank (RBNZ) figures show that mortgage lending for new purchases, house moves, and top-ups in May was about $4.3bn, down by 33% (or $2.2bn) from a year ago. The falls in activity in May were smaller than April for both owner-occupiers and investors (see the first chart), or put another way both groups improved a bit last month. A rebound was always likely, given the shift of displaced buyer/borrower activity from April into May, as well as the lenders themselves having more breathing space in May to write new loans. If anything, however, the rebound was smaller than might have been expected.

Proportion of lending at high LVRs (Source: RBNZ)
Proportion of lending at high LVRs (Source: RBNZ)

In terms of the split by loan to value ratio (LVR), these figures are obviously less important now that the RBNZ has removed the speed limits (from 1st May). However, the figures are still being reported and they showed a tick-up in May for both owner-occupiers and investors, as shown in the second chart. However, banks still seem to be approaching high LVR lending with due caution; surely the right approach given current economic uncertainty and job losses.

Proportion of lending interest-only (Source: RBNZ)
Proportion of lending interest-only (Source: RBNZ)

Meanwhile, the proportion of new lending on interest-only terms did edge down a bit in May, but remains higher than it has for several months (see the third chart). The bulk of this increase has been driven by owner-occupiers, with their loans on interest-only terms accounting for almost 20% of all activity in May. There are no surprises here, given that households have been seeking some leeway to reduce their expenses during this tough period.

Average two-year fixed mortgage rates (Source: interest.co.nz)
Average two-year fixed mortgage rates (Source: interest.co.nz)

More generally, mortgage market conditions remain pretty favourable for borrowers. Granted, checks around income and expenses are likely to remain stringent, as well as the serviceability testing by banks (i.e. checking affordability at current interest rates but also theoretically higher rates). But at the same time, competition amongst the banks is still intense and fixed mortgage rates continue to drop (see the fourth chart). Even over longer fixed periods, such as five years, some mortgages are now available at interest rates of 3% or less. Another example of competitive pressures is Kiwibank’s recent move to significantly lower floating mortgage rates. And on top of all that, yesterday’s official cash rate decision, to hold at 0.25%, and the RBNZ’s accompanying ‘dovish’ (i.e. cautious) statement point to little chance of mortgage rates rising anytime soon either.

As we move through winter, the normal seasonal lull for property market activity is set to kick in. The crunch period for sales, mortgage lending and prices will then be Spring, as vendors start to hit the market again, mortgage payment deferrals and wage subsidies wear off, and Election-related uncertainty emerges.