Are stressed homeowners taking a punt on 'risky' mortgage rates?

1. Short or long?

Last week’s Reserve Bank figures showed a renewed rise in the share of new lending fixed for terms of up to two years (especially between one and two years), rather than the three-year horizon. In June, 46% of loans were fixed for up to two years, and 16% in the 2-3 year horizon, but in July, those figures were 50% and 12%. There’s often still value in the certainty offered by the longer term fixed rates, but the recent rises in those rates (which has flattened the curve) seems to have driven some borrowers back towards the shorter durations, which also reduces the risk of over-paying if mortgage rates were to drop over the next few years. Maybe in the end, with all of the other strains on household finances at present, a lot of borrowers just have to take the cheapest rate at the time.

2. Still paying close attention to LVRs

Sticking with recent lending data, the loosening in the loan to value ratio rules from June 1 has certainly helped investors who were previously locked out by the requirement to have a minimum 40% deposit. With that requirement now standing at 35%, some investors are back in the game. The share of overall lending to investors has risen from less than 1% in May to 23% in July. To be fair, those extra investors might be topping up or even switching banks, rather than buying more properties, but the figures nevertheless show that LVRs still have an influence on the market, and when they are relaxed, the response can be pretty quick.

3. Repricing remains an issue too

When it comes to the lending market and the continued challenges that many mortgage-holding households are facing at present, we also shouldn’t overlook the ongoing repricing of existing loans from older, lower rates, onto the current market levels. Currently 53% of mortgages (by value) are fixed but due to be repriced in the next 12 months, and many of these will still be looking at a rise in mortgage rates of 1-2%. So far, this process has been managed very smoothly (e.g. mortgage arrears are controlled), with low unemployment helping people adjust to higher debt repayments. But it still might keep a lid on activity levels in the coming period, as people choose to focus on managing higher repayments rather than also trying to think about moving house too.

CoreLogic chief economist Kelvin Davidson: "Investors are back in the game." Photo / Peter Meecham

4. Migration might be easing but it’s still high

Stats NZ will publish July’s net migration data on Tuesday, and for context, these figures have been easing a little lately, as departures rise and arrivals slow. But they’re still very high – about 5000 in June (versus historical average of about 2500) – and this week’s figures will probably be broadly similar in terms of the broadly strong trend. Clearly, high net migration means high population growth, and extra demand for property – stimulating housing activity and prices.

5. Rents to accelerate again?

Stats NZ will also release rental data this week, relating to August (Wednesday). Generally speaking, investors have been finding it tricky to expand their portfolios lately, and with the demand for property rising (e.g. due to net migration), there have been signs in the past few months that rents are starting to increase more quickly again too. For example, July’s figure was 4.1% higher than a year ago, the fastest rise since June last year. The longer-term scope for rents to rise will tend to be capped by the fact that they’re already high in relation to incomes, but we do still seem set for a coming period of faster rental growth.

- Kelvin Davidson is chief economist at property insights firm CoreLogic