The Reserve Bank (RBNZ) has reported that mortgage lending flows in April were about 50% lower than a year ago, with refinancing likely to have fallen less than new loans and transfers from other lenders. The shift to interest-only lending, which started in March, continued in April too. Since we moved down from alert level four, however, momentum in buyer and seller activity has started to rebound, so May should be a better month for mortgage lending – borrowers are certainly benefiting from the latest round of rate ‘wars’.

Given that the alert level four lockdown covered most of last month, April’s mortgage lending figures from the Reserve Bank were always going to be very interesting (and hard to predict) – and they certainly didn’t disappoint. 

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

For April there was only $2.7bn of mortgage lending, down sharply from the figure of almost $5.5bn in the same month last year. Lending to both owner-occupiers and investors fell sharply last month (see the first chart). We don’t get the breakdown from these RBNZ figures, but it seems likely that transfers from other lenders and new mortgages would have both fallen more sharply than refinancing of existing loans (this is certainly the result shown by CoreLogic’s internal mortgage data collection). After all, remember that property sales fell by around 80% in April, but there’s always the normal flow of existing fixed loans rolling over. 

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

Looking at the detail around loan to value ratios (LVRs), the figures didn’t change much in April – as the second chart shows, high LVR lending to both owner-occupiers and investors stayed well below the speed limits. Given the temporary removal of the LVR speed limits from 1st May, it’s conceivable that the next release (due 25th June) will show a rise in high LVR lending – but any rise will probably be minor. After all, the banks themselves will be sticking to cautious lending policies, even if the RBNZ isn’t mandating that approach.

Proportion of lending at debt-to-income ratio >5 (Source: RBNZ)
Proportion of lending at debt-to-income ratio >5 (Source: RBNZ)

Indeed, as the third chart shows, the amount of lending on a ‘high’ debt to income (DTI) ratio has already crept up in recent months, especially for first home buyers. So banks are likely to be cautious about how much further they want to stretch these measures, given the general reduction in job and income security across the economy.

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

Finally, as the fourth chart shows, today’s data also confirmed a continuation of the shift towards interest-only mortgages, as borrowers took advantage of lenders’ flexibility, in order to reduce their household outgoings over the next few months. Another option of course has been to take a payment deferral, and according to the NZ Bankers’ Association, about 54,000 borrowers across $19bn of debt, have opted for this relief in recent months (for context, the total stock of mortgages is about $280bn). One key test for the strength (or otherwise) of the property market will be in August/September when these deferral periods come to an end.

Overall, April was clearly a subdued month for the property market and mortgage lending. However, the early signs for appraisals generated by real estate agents, new listings posted, and valuations ordered have been encouraging for May, so mortgage and sales activity is likely to have rebounded this month. In addition, borrowers are enjoying the latest outbreak of mortgage rate ‘wars’ amongst the banks and other lenders.

As a side note, the economic environment clearly remains uncertain, but tomorrow’s Financial Stability Report (9am) will give another update on the RBNZ’s thinking around property (and other things) and Friday’s Financial Strength Dashboard will also provide updated insight into the banking sector.