CoreLogic research analyst Kelvin Davidson writes:

The Reserve Bank of New Zealand (RBNZ) has reported that mortgage lending activity rose again in December, the ninth consecutive monthly increase and the 11th in the past 12 months (see the first chart). Total lending in 2018 was $64.3bn, up by 8.9% from the figure of $59.1bn in 2017. In truth, December’s increase was hardly a shock, given the recent improving trend. Mortgage lending flows will probably remain solid in 2019, but any further increase in activity is likely to be slow and steady rather than spectacular. 

Annual Change in Lending, $m (Source: RBNZ)

Looking at December’s figures in more detail, it was reassuring to see that ‘risky’ interest-only lending is contained. The share of lending done on interest-only terms is holding below 30%, well down on previous peaks of more than 40% (see the second chart). It’s the investor share of interest-only lending that has really driven the drop in the overall figure over that period, although there’s also been less interest-only lending to owner-occupiers. 

Interest-only lending as % of total (Source: RBNZ)

Meanwhile, it was interesting that despite the loosening of the rules being announced on 28th November, the banks didn’t really budge on high LVR lending in December (see the third chart). Remember that the new rules allow banks to advance up to 20% (previous speed limit of 15%) of owner-occupier lending with less than a 20% deposit, and up to 5% of investor lending with less than a 30% deposit (previously 35%). 

High LVR lending as % of total (Source: RBNZ)

Because there was no change in the investor speed limit itself (only the maximum LVR), it’s not really a surprise that these figures didn’t change much. But given that the banks were already running well below the old speed limit for owner-occupiers, you’d be forgiven for thinking that they could have taken an opportunity in December to push up much closer to that threshold while also staying well away from the new speed limit. 

To us, this simply reinforces our hunch that the looser speed limits may not produce much of a rise in actual lending in 2019. After all, a decent portion of the rise in lending so far seems to have been driven by higher approval rates (mortgage approvals as % of applications), suggesting that only the best borrowers* are coming forward - and it remains to be seen just how many of these high-quality borrowers are left. Secondly, the banks are faced with the prospect of having to hold more capital on their balance sheets in future, and that means less ability to lend. 

That said, yesterday’s figures did at least reaffirm that our lending environment is on a solid footing , which should help to keep any fears about an Australian-style property market slump hitting NZ in the short term at bay. On that note, it’s also worth bearing in mind that more than 80% of NZ’s mortgage debt is fixed, with 33% fixed for at least one year (see the fourth chart). This gives NZ households time to adjust before any interest rate shock hits their finances. By contrast, most lending in Australia is on floating rates, making it much more sensitive to current market conditions.

Structure of mortgage stock, % (Source: RBNZ)