For the second month in a row, mortgaged investors’ share of property purchases across NZ hovered at a record high in February, while the share going to first home buyers waned. However, the game is certainly changing for investors. In addition to the reinstated LVRs, it’s looking almost certain to us that restrictions will be imposed on interest-only lending for investors (as well as potentially caps on debt to income ratios). The Australian experience suggests that tighter interest-only standards can have a significant and lasting impact on investor behaviour.
The rampant demand from mortgaged investors across NZ’s housing market rolled on in February, with their share of purchases holding steady at a record-high 29% (see the first chart). Once again, the numbers will give comfort to the Reserve Bank that they were on solid ground in making the early move to reinstate the loan to value ratio (LVR) rules, and in particular to raise investor deposits all the way back to 40% from 1st May.
As always tends to be the case, the cash investor/multiple property owner figure has remained more stable in recent months, at around 12% of purchases. It’s important to note that some of these may not necessarily be ‘true’ cash buys – i.e. they could have involved taking on extra debt on other properties in a portfolio. But either way, when you add 12% to the mortgaged 29%, it demonstrates the weight of investors in the market.
At the same time, there was more evidence in February that first home buyers (FHBs) may be starting to creak under the pressure of raising ever-larger deposits, even with their access to KiwiSaver funds taken into account. At 22%, their share of purchases has eased back down to levels last seen in early 2018. Meanwhile, those FHBs that are actually managing to get over the line are paying a lot more – the median price paid in February of $615,000 was 18% higher than a year ago, or $93,700 (see the second chart).
These patterns for buyer demand across the various groups have been pretty consistent across the country – in fact, across wider Wellington (City, Lower Hutt, Upper Hutt, and Porirua), mortgaged MPOs have now overtaken first home buyers again for the first time in a while (see the third chart).
It’s also worth noting that the investor upturn has been driven by smaller players, i.e. those that have just made their first investment purchase (an MPO 2) or those that now own 3-4 properties in total after their latest purchase (i.e. 2-3 rentals and their own house) – see the fourth chart. We suspect that these ‘Mum and Dad’ investors are more likely to have been the people most affected by the sharp falls in term deposit rates, or in other words the ones who have had the most incentive to ‘search for yield’ somewhere else.
Overall, investors are clearly still a significant force in the market, but things are about to get harder for them. On top of higher deposit requirements, there’s a looming possibility of debt to income ratio caps for investor loans and/or restrictions on interest-only (I-O) lending. The Australian context could be pretty informative here – their regulator (APRA) put in place a cap on I-O at 30% of new loans (across all borrowers) from September 2017 to December 2018, when these loans had previously been running at more than 45%. Now, I-O loans have subsequently dropped to less than 20%, even though the cap has been removed. This could hint at a mindset change amongst investors in Australia and potentially signals where NZ might head, given that our I-O lending is still about 27% of the total (and more than 40% for investors specifically).