Mortgage lending activity in July was higher than a year ago, driven by owner-occupiers rather than investors, and in particular first home buyers – as has been the case for several months now. Looking ahead to August’s results (due 25th Sep.), given that fixed mortgage rates haven’t really changed as a result of the surprise 0.5% cut to the official cash rate, we wouldn’t anticipate a big spike in lending/borrowing activity. Then looming further out, of course, is the final decision around extra bank capital requirements.

CoreLogic Senior Property Economist Kelvin Davidson writes:

After a solid result in June, mortgage lending activity followed that up with another decent month in July. The total for the month of $5.91m was about $390m above the figure from a year ago ($5.52bn), and reflected a pick up in growth in lending to owner-occupiers (see the first chart). Although investors saw another fall year-on-year in borrowing flows, it was at least the smallest decline since February.

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

Within the owner-occupier category, it’s first home buyers that are still providing a lot of the impetus to mortgage lending activity, although as the second chart shows, other owner-occupiers are recording steady growth as well. A further breakdown of the data continues to show that larger average loan sizes, rather than more loans, are the reason for the overall rise in the value of lending activity. In July, the average loan for an owner-occupier was $234,294, almost $20,000 higher than a year ago.

Annual change in lending, % in past 12 months compared to previous 12 months (Source: RBNZ)

Meanwhile, interest-only lending remains a much smaller part of the market than in the past. In July, the share for this lending was 28.6% - the highest figure for four months, but still much lower than the figures in excess of 40% that were seen in 2015 and into the first half of 2016. This has primarily reflected reduced interest-only lending to investors rather than owner-occupiers.

In terms of high LVR lending, the latest data didn’t really reveal anything new. As the third chart shows, lending to investors at >70% LVR is still pretty much non-existent, and lending to owner-occupiers at >80% LVR is running at about 13% comfortably below the 20% speed limit (and even a bit below the self-imposed 15% that we hear the banks like to stick to). The cautious nature of the lending environment that we find ourselves in is clearly evident in the non-performing loans figures from the Reserve Bank’s Financial Strength Dashboard – across all the main banks, high approval standards have meant that loan distress is very low (see the fourth chart).

Proportion of lending at high LVRs (Source: RBNZ)

 

Non-performing loans ratio* (Source: RBNZ)

Taking a step back from the detailed numbers, it was interesting to see the decline in investor lending ease off a bit in July - and that could continue in the coming months as confidence fully recovers in response to the scrapping of the capital gains tax proposals, and the returns available on other assets (e.g. term deposits) remain low. Rising rents and yields (albeit from a low base), as well as a potential loosening of the (currently-tight) LVR speed limit for investors in November could also help.

Just to finish off with three other points around the lending environment. First, recent days have brought whispers of banks starting to relax the internal 7-8% serviceability tests. It’s hard to verify if this is true, but if it is, should help to raise mortgage activity in the coming months. Second, however, don’t necessarily expect a big boost to August’s lending stats (due 25th Sep.) as a result of the latest chunky 0.5% cut to the official cash rate. In reality, fixed mortgage rates barely changed, and so any flow-through to borrowing/lending activity will probably be modest.

And third, as we’ve emphasised for a while now, the largest factor on the horizon is what the RBNZ will decide about bank capital requirements and how that might affect mortgage rates – discussions we’ve had with the industry point to rates turning around and starting to rise a bit as a result of the proposals, albeit perhaps not until 2021.