After a lull in August, mortgage lending activity rebounded strongly in September – again driven by owner-occupiers, but this time with investors also showing signs of life. The figures suggest that the easing of the interest rates used for banks’ internal serviceability tests in late August has had an immediate and significant impact. The strength in lending activity in September also starts to put a bigger question mark over the chances that the loan-to-value speed limits get loosened in November.

Today’s mortgage lending figures from the Reserve Bank (RBNZ) showed a significant rebound after the lull in August. There was $5.5bn of mortgage lending in September, almost $750m more than the same month a year ago – the largest annual rise since November last year (+$930m), and a sharp turnaround from August’s drop of $16m. As the first chart shows, owner-occupiers made the largest contribution to September’s strength, but investors also recorded an annual rise – the first since August last year.

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


Admittedly, the $60m annual rise in lending for investors wasn’t a massive gain. But it’s still very noteworthy, given that the trend has been downwards for such an extended period. The rise also squares with other data showing that this segment of the market has recently started to look stronger. For example, the CoreLogic Buyer Classification series shows that the number of purchases by mortgaged investors rose in Q3, up by 8% from a year ago (see the second chart). That was the strongest annual gain since Q2 2016, i.e. prior to LVR III, which required investors to have a 40% deposit.

Annual % change in purchases by mortgaged multiple property investors (Source: CoreLogic)


Reasons for the rebound in investor activity in the property market aren’t too hard to find. For a start, the possibility of a broad-based capital gains tax has been removed. On top of that, property rents and gross yields are rising, while at the same time, returns on other assets (e.g. term deposits) have dropped. Interestingly, growth in the amount of money held in term deposits has slowed lately (see the third chart).

Six-month % change in domestic households’ term deposit balances (Source: RBNZ)


Elsewhere in today’s RBNZ release we also got the latest update on banks’ lending flows against the LVR speed limits. And as the fourth chart shows, there’s still plenty of headroom – lending above 80% LVR for owner-occupiers was just 12.5%, below the 20% limit and even the internal 15% the banks reportedly like to adhere to. High LVR investor lending also stayed well below 1% (versus speed limit of 5%).

Proportion of lending at high LVRs (Source: RBNZ)


Overall, we’re well past ‘peak tightness’ for credit conditions and – as we anticipated in last month’s lending commentary – the easing in the interest rates that the banks are using for their internal serviceability tests has clearly had a large, beneficial impact for borrowers. Next on the horizon is the official cash rate decision on 13th November (2pm), which looks likely to be a cut to 0.75%, further support for borrowers.

However, it’s not all one-way traffic. First, we have the Financial Stability Report on 27th November, which for quite a while has been looking likely to contain a loosening of the LVR rules. Today’s strong data actually put quite a big question mark over that. And then by the first week of December, we’ll also know the final outcome of the RBNZ’s review of bank capital requirements, which will tend to limit credit availability and/or result in higher mortgage rates than otherwise. In terms of mortgage activity and property sales, this could start to dampen activity from the second half of next year, although probably more likely in 2021.