Despite Easter/ANZAC being close together and many people taking an extended holiday (rather than visiting the bank), mortgage lending activity was solid in April. Even so, the banks in aggregate are still operating well below the LVR speed limits, and interest-only lending to investors is contained too. Over the next few months, there has to be a decent chance that the scrapping of the capital gains tax proposals and the cut in the official cash rate will provide a further boost to activity in the mortgage market.
CoreLogic Senior Property Economist Kelvin Davidson writes:
The latest figures from the Reserve Bank (RBNZ) showed that mortgage lending in April was $5.45bn, up by about $80m from the figure of $5.38m a year ago. As the first chart shows, lending to owner-occupiers rebounded a bit in April (after a soft March), but investor lending continues to edge down on a year-on-year basis. As part of the rise in owner-occupier lending, high loan to value ratio (LVR) lending to first home buyers (FHBs) continues to grow, albeit there’s been an inevitable slowdown from the previously very rapid rates (see the second chart).
Once again, the number of loans approved across all borrowers was relatively flat, so the growth in lending in April was driven by larger average loan sizes. Meanwhile, the LVR speed limits are still not being tested by the banks (at least in aggregate). The proportion of lending to owner-occupiers in April with an LVR >80% was only 12.6%, well below the 20% cap (see the third chart). Note that it’ll be July before we get the first figures on investor lending at the new, lower 30% deposit requirement (still a 5% speed limit).
In terms of interest-only lending, activity here remains contained, especially for investors (see the fourth chart). As we suggested in a Pulse last week (corelogic.co.nz/news/tax-ring-fence-unlikely-cause-dramatic-change-investor-behaviour), it’s not only that new interest-only loans have become harder to secure, but also that banks are more reluctant to roll over existing loans, often preferring a switch to a normal repayment mortgage.
So where might things go next? It was probably a bit too soon to have expected the scrapping of the capital gains tax proposals on April 17th to have had much of an effect on the lending figures for last month, but this may well provide a bit of momentum to investor lending and the overall mortgage market in May (data to be released on 27th June). In addition, we’ve had the cut in the official cash rate on May 8th, some of which has been passed through to mortgage rates. Hence, this is likely to also boost borrowing activity to some degree – albeit people still obviously have to raise the deposit, satisfy the income/expense tests, and that they are able to afford to pay at a theoretical mortgage rate of 7-8%.
To finish off, it’s also worth noting that the final decision from the RBNZ about extra capital requirements for the banks is now expected by the end of November this year and any new rules would start to be phased in from April next year. Interestingly, the RBNZ feels that it has already made a good start on bolstering financial stability, via the LVR rules – see their research here https://www.rbnz.govt.nz/news/2019/05/lvr-restrictions-promote-financial-stability-evaluation-finds.
The research also acknowledges that the LVRs did have adverse effects at various times (e.g. disproportionately limiting activity from first home buyers in the early days), but it rightly points out that these were recognised and the rules adjusted accordingly. This week’s Financial Stability Report (Wednesday 9am) may well provide further insight into the RBNZ’s future plans for the LVRs.