COMMENT: On September 15, 2008, US investment bank Lehman Brothers filed for bankruptcy kicking off what has come to be known as the Global Financial Crisis. Lehman Brothers was a major investor in sub-prime mortgage-backed securities, and followed its collapse was a year of banks around the world strongly denying that they were like Lehman and then swiftly reviewing their lending policies.
Thirteen years later New Zealand lending institutions are having to improve and remake their policies all over again, which is proving to be very frustrating for everyone involved because their policies were actually already very responsible. And so, the only thing a bank can do to prove they aren’t part of a fast and loose lending environment is to make their already reasonably difficult-to-meet criteria even more difficult to meet.
So what does 2022 look like for anyone wanting to buy a home, upgrade their existing home or purchase an investment property?
The first hurdle will be the Loan to Value Ratio (LVR) restrictions, which have been a popular and easy to understand lever for controlling how much a buyer can borrow against a property. Don’t expect these to go away any time soon. The Reserve Bank of New Zealand will need to see a significant period of calm in the housing market before considering removing these and there is no evidence of that yet.
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For first home buyers, securing a home loan with less than a 20% deposit will remain difficult but not impossible, with the Reserve Bank limiting high-LVR loans to 10% of total new lending to owner-occupiers. For investors seeking to purchase an existing property, the lending environment is even tougher: the deposit threshold is 40%, and high-LVR loans are limited to 5% of a bank’s new lending to investors. The thresholds for both buyer groups, though, are lower if they are buying new builds.
Although the Reserve Bank is still weighing up whether or not make them mandatory, expect Debt to Income Ratios (DTRs) - a restriction on how much you can borrow based on your overall debt - to become the norm for most banks in the first half of the year. From a bank’s point of view, they are a great way to show they are toeing the line in responsible lending but are actually a terribly blunt instrument for measuring debt-affordability. Using an extreme example to prove my point, someone who has a $600,000 mortgage at 3.6% per annum needs the same income under DTI rules as someone who has a $600,000 credit card at 20% per annum.
Finally, everyone who applies for a mortgage in 2022 will have their expenses from the previous three months scrutinised. If you thought avocado on toast was ruining the next generation’s chance of owning a home in 2019, then you are not going to like 2022 at all.
Consider this: just adding soy milk to your daily takeaway coffee - at a cost of 50c - will reduce your ability to purchase a home by $2,210. Not the daily coffee itself - that reduces your ability to purchase by over $20,000 - just adding soy milk. Think about how many small purchases we make regularly that we don’t even think about: our two streaming TV subscriptions instead of just the one we watch, that extra-fast broadband service that we don’t particularly need for scrolling our Facebook newsfeed. All of these will add up to significantly reduce applicants’ ability to afford a home in the near future.
Like DTRs, this intense focus on expenses may loosen a bit in late 2022 if the housing industry stabilises although probably not enough for the average applicant to notice.
The good news is, for those who minimise debt / expenses and maximise savings, the property market is going to be a lot less competitive. For diligent savers, open homes will be quieter and the odds of getting the house you love at a reasonable price will be much better than in the past few years.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
