After a solid month in April, mortgage lending activity dialed back a little in May, with the investor part of the market feeling the pinch. Indeed, owner-occupiers remain the key players in the mortgage market, and in particular first home buyers. That is consistent with the message from the CoreLogic Buyer Classification data. Meanwhile, lending standards remain high – the LVR speed limits for owner-occupiers are not being tested and mortgage repayment problems are very low.
CoreLogic Senior Property Economist Kelvin Davidson writes:
The strength of mortgage lending in April fell away a bit in May, today’s figures from the Reserve Bank (RBNZ) show. Gross new lending in May was $6.47bn, down by about $120m from the same month last year. Again, owner-occupiers have borrowed more year-on-year (up by about $300m), but investor lending remains much more subdued (see the first chart).
The CoreLogic Buyer Classification data also shows something of a divergence between owner-occupiers and investors around the country – i.e. in Auckland, Hamilton, Christchurch, and Dunedin, first home buyers (FHBs) have recently had higher % shares of property purchases than mortgaged investors; something that hasn’t really been seen before, or at least not for several years.
Other detail in the RBNZ’s release shows that average loan sizes for investors are fairly stable, at the $340-350k mark. However, loans to FHBs are getting steadily bigger (see the second chart). FHBs with less than a 20% deposit borrowed $473,373 on average in May, up by close to $25,000 from a year ago (although note that total lending to low deposit, or high LVR, FHBs in May of $480m was only 7.5% of overall activity). FHBs with higher deposits had an average loan size in May of about $384,000, pretty much unchanged from a year earlier.
Meanwhile, the share of lending to owner-occupiers at >80% LVR increased in May, but not by much – only edging up from 12.6% in April to 12.9% (see the third chart). Rather than interpreting the big gap between the 20% speed limit and what’s actually happening as a sign of the high LVR lending cap not being binding/required, some anecdotes we’ve heard suggest that the banks like to stick to a 5% buffer below the speed limit, as a form of insurance. If that’s right, then the effective speed limit is actually 15% and owner-occupier lending activity is in fact creeping closer to it.
For investors, by contrast, the speed limit may already be biting quite hard. Although the first results of lending activity at the new deposit requirement (at least 30%) for investors isn’t due until the next mortgage lending release on 24th July, the fact that lending to this group has been so subdued lately suggests that the 5% speed limit is having a real effect – after all, banks keeping a 5% buffer would suggest that almost no high LVR loans are available to investors at present (even though the scrapping of proposed capital gains tax on 17th April has probably meant that more investors would like to get a loan if they could).
Looking ahead, we’ve already had one cut in the official cash rate and yesterday’s statement from the RBNZ strongly suggested that there’ll be another cut in August (and potentially November too). In addition, there’s a good chance that the LVR rules will be relaxed again in November. However, with the banks likely to have to start boosting their capital reserves from April next year, ‘restraint’ will be the order of the day. Indeed, prudent lending behaviour from the banks was in evidence in the latest Financial Strength Dashboard from the RBNZ, showing that non-performing loan ratios for all of the major lenders are comfortably less than 1% (see the fourth chart). In other words, mortgage repayment problems are very low in NZ, which partly reflects the stringent tests that prospective borrowers have to pass to get a loan in the first place.