Despite August being affected by the latest round of social restrictions, mortgage lending activity showed no clear effects. Indeed, lending flows last month were again significantly higher than a year earlier, with low mortgage rates clearly still playing a key role in boosting activity. The end of the wage subsidy and the prospect of higher unemployment needs to continue to be watched closely, but there doesn’t seem to be too much else on the horizon that might slow mortgage lending activity markedly over the next few months.

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

After a bumper level of activity in July, today’s mortgage lending figures from the Reserve Bank (RBNZ) showed that banks followed it up with another busy month in August. There was about $6.8bn of new lending last month, up by around $1.4bn from the same time a year ago, and a continuation of the strong rebound from April and May’s (enforced) weakness – see the first chart. Given the move back up the alert levels on 12th August, you’d be forgiven for thinking that lending activity might have been much weaker than it has turned out to have been.

Proportion of lending at >80% LVR (Source: RBNZ)
Proportion of lending at >80% LVR (Source: RBNZ)

The breakdown of the figures showed that interest-only lending has stabilised, sitting at 25-26% of the total for the past three months now (still much lower than figures of about 40% in 2015-16). Meanwhile, even though the loan to value ratio (LVR) speed limits have been temporarily removed, the share of lending at >80% LVR has also tailed off a bit, sitting at 11.2% in August (see the second chart). In addition, the banks continue to scrutinise borrowers’ income and expenses very closely.

Household term deposit balances $bn (Source: RBNZ)
Household term deposit balances $bn (Source: RBNZ)

Of course, it’s not surprising to see that mortgage lending flows were buoyant in August, given that we already knew other indicators such as the numbers of valuations ordered by banks and actual sales volumes themselves were high. More generally, borrowers are being encouraged into property by super-low mortgage rates and (especially for investors) the low returns available on other assets, such as term deposits. Indeed, other RBNZ figures show that the amount of money held by households in term deposits has fallen lately (see the third chart).

Proportion of existing mortgages fixed/floating by holder type (Source: RBNZ)
Proportion of existing mortgages fixed/floating by holder type (Source: RBNZ)

The sweet spot for most borrowers at present seems to be a one-year fixed rate and indeed more than half (54%) of existing mortgage debt (by value) is currently fixed for up to one year (see the fourth chart). Only 14% of debt is currently floating, the lowest share since 2008. In ‘normal’ times, having almost 70% of mortgage debt either floating or fixed for a short period may present a risk if mortgage rates were to rise – but in the current environment, higher mortgage rates are a long way off. In fact, yesterday’s RBNZ statement suggested mortgage rates have probably got further to fall yet.

Overall, mortgage lending activity is giving the same message as many other indicators at present, showing that the property market continues to press ahead, even amidst COVID uncertainty. To be fair, now that the wage subsidy is wearing off, we need to keep watching the unemployment situation. But even if/when unemployment does start to rise, low mortgage rates could still remain the dominant factor, especially when combined with the ability for people to take a payment deferral until March next year.