The Reserve Bank have just announced that they are concerned about low deposit lending not pulling back as they had hoped following the return of Loan to Value Ratio rules earlier this year. In June, lending where the deposit was less than 20% the property’s valuation amounted to $816 million. This was the equivalent of 9.6% of all lending.
This is far less than the 20% of all lending limit set by the Reserve Bank and even below the 10% limit they will now require from October 1. But in May the proportion was 9.3%, April 8.5%, March 8.0%, and February 7.8%. So, in spite of the tightening of LVR rules the proportion of bank lending considered to be “risky” has been increasing. So, the Reserve Bank has acted.
Because low deposit lending is below 10% of all registered bank lending, does this mean nothing will happen? No. Banks know the Reserve Bank is sensitive about any breach of the limit and volatility in monthly lending could easily tip a bank above 10%. So, we can expect a fairly sharp cutback from today in the number of low deposit loans which banks will make.
Which group will be hit the hardest? In the new Memorandum of Understanding between the Finance Minister and Reserve Bank regarding macro-prudential policy (rules on bank lending) the Finance Minister has requested that the Reserve Bank limit the negative impact on first home buyers. But therein lies the problem.
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First home buyers accounted for $621m worth, or just over 76%, of low deposit lending in June. Owner-occupiers accounted for 23% and investors accounted for only 0.5%. The only way banks will be able to get safely below the new 10% of total lending limit is if they quickly cut back low deposit lending to first home buyers.
In June, 38% of lending to first home buyers involved a deposit of less than 20% whereas for owner occupiers this was just 4% and investors 0.3%. The rule change is going to make it harder for young people to get their foot on the ladder.
This is unfortunate timing for such people. The monthly survey of real estate agents which I run each month with the Real Estate Institute of New Zealand has just revealed that in Auckland a net 10% of agents are seeing more first home buyers. In late-April a net 10% were seeing fewer such buyers. Now, even if those buyers manage to find a property amongst listings which number 26% fewer than a year ago, their bank is not going to be as generous in advancing funds as before.
In fact, some buyers should expect their loan pre-approvals to be withdrawn. Then it gets worse, The Reserve Bank will review its monetary policy on August 18 and chances are high that they will push interest rates higher.
Tony Alexander: “The rule change is going to make it harder for young people to get their foot on the ladder.” Photo / Supplied
What about investors? They will be negatively affected by coming higher interest rates as well. But banks already require that they have a 40% deposit, and lending to investors with less than a 20% deposit amounted to only $4m in June. That is not even enough to buy four average priced houses in Auckland.
Will the minimum deposit change stall the housing market? Not yet. The survey I run with REINZ has just revealed a nationwide lift in the proportion of agents seeing FOMO (fear of missing out) on the part of buyers to 66% from a low of 49% three months ago. Worries about falling prices (FOOP or fear of overpaying) have fallen to a five-month low.
Throw in the increased popular discussion regarding property shortages, rising prices, and struggling buyers, and we can see the only way the Reserve Bank will be able to meet the Finance Minister’s desire to favour first home buyers is if the minimum deposit for investors gets boosted well beyond 40%. Will they do it? Probably not.
But the Reserve Bank has just also been given power to set minimum interest rates banks must use when calculating ability to service debt. By the looks of it they could set a higher rate for investors than owner occupiers. The same goes for debt to income ratios which they now have the power to impose, along with new ability to set maximum ratios for debt servicing to income.
Given the still strong housing market, the chances are strong that investors will soon be hit with some new restrictions on how much banks will be able to lend to them.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
