The latest figures from the Reserve Bank showed that mortgage activity had another bumper month to end 2019, with the figure of $6.5bn of gross new lending in December more than $1.1bn higher than the same month a year earlier. In fact, the year on year rise in activity has been at least $500m for four months in a row now – such a strong run of growth hasn’t been seen since late 2015.

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



As the first chart shows, both investors and owner-occupiers contributed to the strong end to 2019, with high LVR (i.e. >80%) first home buyers (FHBs) remaining a key source of growth within the owner-occupier category. High LVR FHBs have actually now recorded year on year rises of at least 25% every month since December 2017 (see the second chart).

Annual % change in lending flows (Source: RBNZ)


Growth in the flow of lending in December was driven by both a lift in the number of loans as well as by larger average loans. Indeed, there were about 24,000 loans in December 2019, a 10% lift on December 2018. The average loan also grew over the past year from about $242,000 to $269,000. For first home buyers, the average new loan size in December 2019 was about $487,000.

Proportion of lending at high LVRs (Source: RBNZ)


This growth has in-part been associated with a marked relaxation in lending standards. For example, the share of owner-occupier lending at >80% LVR lifted slightly to 13.2% – the highest share since the limits were introduced, however still well below the speed limit of 20% (see the third chart). Meanwhile, high LVR lending to investors is also well contained, at less than 1% (speed limit 5%). Similarly, interest only lending is currently running at 27% of the total, well below the peak of 41% that was seen in mid-2016 (see the fourth chart). Anecdotally, we’ve also heard that banks are pretty reluctant to renew existing interest only loans – instead preferring to switch them to principal repayments.

Share of total lending on interest only terms (Source: RBNZ)


The upshot is that mortgage lending activity is showing ‘responsible’ growth, with the easing of the banks’ internal serviceability tests, which started in late August, likely to still be playing a key role in boosting demand. Looking ahead, low interest rates are likely to keep owner-occupiers keen in the coming months, while investor demand should also stay solid on the back of those low mortgages rates, as well as the lack of attractive, ‘low risk’ alternatives to property (e.g. low term deposit rates).

Of course, there are also some dampening factors to keep an eye on. First, the higher bank capital requirements will begin from 1st July, and the lenders will presumably be already taking action (e.g. limiting the pool of money to be lent out) in advance of that official start date. Second, as the RBNZ noted back in November’s Financial Stability Report, “there remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending”. They chose to keep the LVR speed limits unchanged at that time, but statements like that suggest that a continuation of the recent mortgage and housing market upturn (sales and values) could potentially even trigger tighter LVRs at some stage this year.

We wouldn’t necessarily expect LVRs to be tightened (because lending remains ‘responsible’) and, even if they were, it may not be until late in the year. But it’s still an issue to keep a close eye on.