ANALYSIS: Interest rates are the talk of the New Zealand property market, what with the one-year fixed-rate more than doubling to 4.5% and the Official Cash Rate jumping from 0.25% to 2%, all within the last nine months. To the casual observer, it appears that interest rates and uncertainty are the leading cause of the sudden cooling of the New Zealand property market.
Around the same time as interest rates began to increase, the Credit Contracts and Consumer Finance Act (CCCFA) was starting to be implemented by the banks. While the official start date for the new regulations was December 1, 2021, banks had begun to change their policies to meet their CCCFA requirements as early as September and October of that year. Many policies were changed within each bank, leading to a completely different way of assessing mortgage applications at all the lending institutions.
Of all the lending policies that changed, the most significant was the requirement to assess the previous three months of spending by an applicant. Where previously, a bank assessor could view some expenses as obviously going to cease after a new mortgage was drawn down, this rational approach to lending was removed from the banks. This led to several stories in the media of coffees and Kmart crashing mortgage deals.
So, which factor had the most impact on borrowers - interest rate rises or the CCCFA? It's easiest to see by way of an example.
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Let's look at a couple who, in June 2021 (before interest rates began rising and the CCCFA was implemented), could have borrowed $800,000. At the time, affordability for mortgages was being calculated, or stress-tested, at the servicing rate of around 6.5%. Today, using the updated servicing rates, that couple would only be able to borrow approximately $735,000, reducing just over 8% of their borrowing capacity.
Mortgage Lab founder Rupert Gough: "It takes a lot to stop the enthusiasm of Kiwis from buying homes." Photo / Fiona Goodall
Now let's assume the rates had never moved. How much would the CCCFA policies have affected someone borrowing $800,000?
Borrowers who are excellent budgeters wouldn't have been affected at all. If their previous three months' spending was below the minimum that the bank assumes (roughly $550 -$750 per week depending on the number of children and cars you have), borrowing could still be at $800,000.
However, if you weren't a perfect budgeter - if you spent money on coffee, the gym, entertainment or a movie, a drink with friends, travel, Netflix, Lotto, charity donations, takeaways, clothing or any form of gluten-supported pulverised avocado - then you are going to have reduced your borrowing. By how much? $100 per week total of any items in the list (or similar expense) would reduce your lending to less than $735,000 (the equivalent of the effect that interest rates have had on your borrowing). That $100, by the way, is for a couple, not per person.
It's important to clarify that the lending industry (i.e., banks etc.) and a good portion of the public have been vocal about the immense impact of the CCCFA, which the Government promised to amend this month. It is reasonable to assume that new homeowners can cut down on coffees or takeaways once they have a house, but the regulations have tied the bank's hands. Under the current regulations, the banks must consider these recent expenses when calculating mortgage affordability.
Now, it could be that the reason the market has cooled off - the reason buyers aren't turning up to open homes as much as they were this time last year - is because they are worried about where interest rates are going to be in the future or because house prices have simply got too high. But it takes a lot to stop the enthusiasm of Kiwis from buying homes. I would suggest that many people are still keen to purchase property but are unable to get the mortgage they need to buy the home they want.
And so the question for those seeking a mortgage is: what is the primary factor that has stopped them from getting a mortgage? The answer is, without a doubt, their discretionary spending, which is a direct result of the CCCFA policies.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
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