In the end the Reserve Bank (RBNZ) took the cautious path and held the official cash rate (OCR) at 1%, at least for now (a cut could still come through in the New Year). Meanwhile, other figures that they released an hour after the OCR decision may also give the RBNZ reasons to be cautious. In particular, the share of new lending to first home buyers with a debt-to-income ratio above five has risen in recent months. That hints at a slightly higher risk profile.

So as it’s turned out the RBNZ has taken a ‘wait and see’ approach and decided to keep the OCR at 1%. The decision was not universally expected, with a number of analysts believing that they’d cut on the back of continued weakness in business confidence and a faltering economic outlook. However, the statement mentioned how “economic developments … do not warrant a change to the already stimulatory monetary setting at this time”. That said, the Reserve Bank’s GDP forecasts have been lowered, and as the first chart shows, their reduced OCR projections hint at a cut in the New Year (the next decision will be 12th February).

Official cash rate and mortgage rates (Source: RBNZ)


With this decision the RBNZ has probably taken the more cautious path (compared to an OCR cut), especially given early signs of an upturn in the property market – e.g. the CoreLogic QV House Price Index showed that value growth accelerated from 2.4% year-on-year in September to 2.8% in October, an eight-month high (see the second chart). A strong contribution to that national upturn has come from Auckland, where average values have risen by 0.6% since July. It’s likely that the easing of borrowers’ serviceability testing by the banks (which started in late August) has been playing a key role in the stronger market results.

Percentage change in NZ average property values (Source: CoreLogic)


In addition, after having looked pretty much locked in for quite some time, those early signs of a property upturn mean that there is now doubt around whether or not the RBNZ will loosen the loan-to-value ratio speed limits as part of its Financial Stability Report (FSR) two weeks from today. We’ll certainly be waiting for that report on the 27th with keen interest.

Indeed, other figures that they also just released today – covering debt to income (DTI) ratios for new lending – may also give the RBNZ reasons to be cautious about any regulatory changes that could stimulate the housing market. For example, after dropping over 2017 and 2018, the share of new lending to first home buyers (FHBs) with a DTI above five has started to rise again (see the third chart). In other words, on this measure at least, the risk profile for lending to FHBs has edged up again in recent months.

NZ % of new lending to first home buyers at DTI >5 (Source: RBNZ)


The DTI figures are also available for Auckland specifically, and also show some really interesting patterns. Back in mid-2017, across all owner-occupiers, 31% of new loans were at a DTI above six. But since then the figure has been reined in by the banks, and is currently 19%. Of course, the flipside of relatively fewer loans at DTIs above six is that there’s now a greater proportion of lending at DTIs of four and five (see fourth chart).

Percentage of new lending to Auckland owner-occupiers by debt-to-income ratio bracket (Source: RBNZ)


Overall, then, the next milestone to watch is the FSR on 27th November. And coming quick on the heels of that decision by the RBNZ, they’re also due to announce the results of their bank capital review on 5th December. We think the scene is set for a gentle rise in lending activity and property sales next year, but any requirement for banks to increase the capital held on their balance sheet could mean a more subdued 2021.