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Source: MIL-OSI Submissions
Source: CoreLogic

By Kelvin Davidson, Chief Property Economist, CoreLogic New Zealand

Given that we already knew property sales activity had been solid again in June, it was no surprise to see another busy month in the mortgage lending figures. One interesting aspect of the split by LVR/borrower type is that first home buyers basically have a monopoly on the money being lent out with less than a 20% deposit. However, nothing lasts forever, and we suspect that ‘slowdown’ will be a key word used to describe lending activity (and the wider property market) over the coming months, especially with mortgage rates increasing.

The latest figures from the Reserve Bank (RBNZ) showed that mortgage lending activity held up at a high level again in June, with the overall figure of $8.5bn about $3.2bn higher than a year ago (albeit that June 2020 was still a COVID-affected month to some extent). As the first chart shows, owner-occupiers had another strong result last month, although a fair degree of the previous momentum for investors now seems to have dissipated – that’s fully consistent with the pattern already shown by our own Buyer Classification data for June*.

Meanwhile, the breakdown of the lending figures by loan to value ratio (LVR) shows that banks still have a cautious (prudent) attitude when it comes to deposits, with only 11.4% of owner-occupier loans being made with less than a 20% deposit (versus the speed limit of 20%) – see the second chart. It’s interesting to note that of that 11.4% of ‘exempt’ owner-occupier lending, about four-fifths is accounted for by first home buyers (FHBs). Put another way, FHBs (and their banks) are certainly utilising the speed limits to enter the market with less than a 20% deposit. At the same time, the share of high LVR lending going to investors has stayed very low, and the new breakdown relating to 40% deposits of course shows the same message.

The split of the latest figures by payment method shows that interest-only lending to investors has dropped as a share of overall activity (see the third chart), which is interesting given that the RBNZ has declined to look at any restrictions on this type of finance. One implication could be that demand itself has eased, perhaps as investors react to the phased removal of interest deductibility and instead look to raise their equity levels as quickly as possible (by repaying some mortgage principal too).

Clearly, when it comes to the overall themes for lending activity, the increases in mortgage rates have become a key issue in the past few weeks – especially since those with mortgages have larger debts than before, and even a small rise in interest rates from the current low base works out to be a large proportional change, requiring an adjustment to other areas of spending.

However, it’s far too early to be worrying about issues like negative equity and mortgagee sales. After all, mortgagee sales themselves have been rock-bottom lately with just 16 in Q2 (see the fourth chart). And most commentators also agree that the speed and scale of interest rates increases over the next year or two will be slow and modest by past standards – partly because of the fact that debt levels are higher than before. On top of that, unemployment is falling and expected to continue on that path, meaning most households should be able to adjust to higher mortgage rates.

On the whole, it’s clear that the mortgage market remained pretty busy in June, but as with a range of other property indicators, we suspect that the peak is close (or perhaps even slightly in the past) and ‘slowdown’ will be the key phrase for the next 6-12 months.