Mortgage lending flows rose again in February, with both owner-occupiers and investors recording increases. Of course, with COVID-19 really only kicking in domestically after February had ended, the bigger interest lies with March’s mortgage lending figures, due to be released 29th April. It is almost certain that lending activity will have started to weaken, as banks, buyers, and sellers all reassess their priorities. Indeed, from tomorrow (Thursday 26th March), when Level 4 is implemented and lockdown is enforced, almost all real estate activity will be unable to complete, so new mortgages will also fall away. 

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

Today’s Reserve Bank figures showed that there was $5.6bn of mortgage lending activity in February, up by almost $800m from the same month last year. Lending to both owner-occupiers and investors recorded a rise, with the continued increases for investors noteworthy after a soft patch in late 2018 and most of 2019 (see the first chart). These figures are consistent with the CoreLogic Buyer Classification series showing that mortgaged investors have been the key growth segment in terms of property purchases over the past 6-9 months.

Proportion of lending interest-only (Source: RBNZ)
Proportion of lending interest-only (Source: RBNZ)

The recent growth in lending activity has been driven primarily by principal & interest mortgages, although interest-only lending did slightly pick up as well. However in February, only 9.0% of all lending was to investors on interest-only terms (see the second chart), down from a peak of 19% in 2016. It’s always hard to know if this is supply or demand driven, but in this case probably a bit of both – banks are less willing to advance interest-only loans and borrowers are wary of the risks of not paying back at least some principal. In light of significant announcements from the Government and Reserve Bank regarding mortgage holidays and shifts to interest-only loans, these statistics will be of real interest once market activity starts to properly resume.

Proportion of owner-occupier lending at high LVRs (Source: RBNZ)
Proportion of owner-occupier lending at high LVRs (Source: RBNZ)

Meanwhile, in another sign of ‘responsible’ lending, banks were still operating comfortably below the LVR speed limits in February. Only 12.7% (versus speed limit of 20%) of lending to owner-occupiers was done with less than a 20% deposit, albeit first home buyers run at a much higher proportion and other owner-occupiers much less – see the third chart.

Of course, the elephant in the room is COVID-19 and today’s figures largely pre-date the real domestic effects of the virus – so we’ll have to wait and see how March’s mortgage lending figures are affected when they’re released on 29th April. We’ve written a lot about all of this lately*, but it seems pretty likely that lending activity will have been taking a hit in recent weeks (even despite lower mortgage rates), as the banks focus on new strategies (e.g. how they’ll tackle increased risks of mortgage repayment problems), buyers stay away from the market anyway, and some would-be sellers de-list or don’t even list in the first place. Indeed, from tomorrow (Thursday 26th March), when Level 4 is implemented and lockdown is enforced, almost all real estate activity will be unable to complete, so new mortgages will also fall away. 

Households’ term deposit holdings (Source: RBNZ)
Households’ term deposit holdings (Source: RBNZ)

On the plus side, at least the Reserve Bank has moved to make it easier for lending to continue to flow once the market can operate, such as by postponing the introduction of the extra bank capital requirements until at least July next year. However, a concern may well be the fact that term deposit balances have begun to fall (see the fourth chart), at least partly due to some people searching for a better yield elsewhere (e.g. in property). Less enthusiasm for term deposits will tend to make it harder for banks to feed the money out on the other side of the equation as a mortgage.

The introduction of mortgage holidays should limit the number of forced sales that occur, considering the likely lift in unemployment and reduction in borrowers income over the coming months, in the wake of COVID-19 and the impending lockdown on people movement and activity.

Overall, we’re obviously in a period of great uncertainty and many ‘downside risks’. Indeed, our simple forecasting model for overall sales volumes indicates that there might be a 15-20% decline in activity this year (relative to 2019), whereas we were previously projecting a 2-3% increase. We have to hope the effects of the virus will be relatively short-lived, with any impending transactions simply deferred, leading to a catch-up in the following months. But clearly there is going to be a significant slowdown in property market activity to get through until an eventual recovery begins.