Low-deposit first home buyers helping to boost overall lending flows

Date: 26 March 2019

Mortgage lending activity rose again in February, with the growth in loans to first home buyers with LVRs >80% far outstripping overall volumes. However, the banks are still pretty cautious about who they lend to (in terms of debt servicing ability), while the LVR speed limits aren’t yet in sight either. So it seems unlikely that the Reserve Bank would be especially concerned yet. Meanwhile, the rekindling of last year’s mortgage rate wars will probably set the scene for more rises in borrowing flows over the next month or two.
CoreLogic Senior Property Economist Kelvin Davidson writes:
The Reserve Bank of New Zealand (RBNZ) has reported that there was $4.8bn of mortgage lending in February, up by about $130m from a year earlier. That extended the run of increases to 11 months (and the 13th in the past 14 months), with larger average loans rather than a rise in the number of loans being the key driver. By borrower type, the increase was again driven by owner-occupiers, with investors still showing broadly flat volumes year-on-year. (see the first chart).
Annual Change in Lending, $m (Source: RBNZ)
First home buyers (FHBs) with LVRs >80% continue to be key contributors to the overall growth in mortgage activity, as they have been ever since the fourth iteration of the LVR rules in January last year (when the high LVR owner-occupier speed limit was raised from 10% to 15%). As the second chart shows, lending to high LVR FHBs in February was 46% higher than the same month last year, far outstripping the growth in lending across all groups. In February, the average loan for FHBs with LVRs >80% was $441,576, more than $83,000 higher than the figure for FHBs <80% LVR, and not far off double the overall average loan size.
Annual Change in Lending, % (Source: RBNZ)
Will the RBNZ be concerned about this rise in high LVR lending to FHBs? That seems unlikely, at this stage at least. Sure, they’ll be keeping a close eye on the figures. But the rules aren’t targeted specifically at any individual group, and high LVR lending across all owner-occupiers in February was only 12.0% of the total. This was pretty much the same as 12.1% in January, and still comfortably below the new speed limit of 20% (see the third chart). Given the banks’ strict lending criteria (e.g. income and expense testing), those getting loans will only be the ‘best’ borrowers anyway – they’ll be more likely to keep servicing the debt in the (unlikely) event of a major economic and property downturn.

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


Looking ahead, the rise in mortgage lending looks set to roll on, giving support to sales volumes and property values. Competition amongst the banks will stay pretty intense and this will lead to more attractive deals for borrowers. Indeed, the past week or so has seen last year’s mortgage rate wars kick into gear again, with several other banks now joining the first-mover HSBC in offering two-year fixed loans at sub-4% rates. Tomorrow’s OCR decision will almost certainly keep the base rate at 1.75% (and reiterate the outlook of no change until 2021), which will also help to maintain the current low mortgage rate environment.

Share of mortgage stock on fixed and floating rates, % (Source: RBNZ)


Finally, we can’t talk about lending without noting again that the stock of existing mortgages is dominated by fixed rate loans (see the fourth chart). That provides a solid footing for our property market by giving households some breathing space in the event of a sudden or sharp rise in mortgage rates. This is also just one reason why we don’t anticipate Australia’s downturn will spread across the ditch – because by contrast, most of their lending is done on floating rates.




Tags: NZ Property Market , Auckland property, NZ realestate