In its financial stability report, NZ's central bank says it stands ready to tighten loan-to-value ratios and introduce debt-to-income limits to reduce the country's exposure to $250 billion in household debt. But it has rejected the Finance Minister's call to tighten up on interest-only mortgages.
Banks and other lenders issued an unprecedented $10.5 billion in new mortgages in March alone, new figures show. Household debt is hitting a record $250 billion, mostly in mortgages. If interest rates go up, New Zealanders are financially exposed like never before.
It is in this environment the Reserve Bank's Deputy Governor Geoff Bascand must front up today to MPs on the finance and expenditure select committee, to explain how the bank plans to reduce families' vulnerability in an ever-rising housing market.
Confirming a Newsroom Pro report this morning, he says a high proportion of new lending has had high debt-to-income and loan-to-value ratios (LVRs). This makes recent borrowers more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house prices.
The recent tightening in LVR requirements, particularly for investor lending, will help to mitigate some of these housing risks and support more sustainable house prices, Bascand says.
“We will be watching how market conditions respond to the Government’s recent policy changes. If required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing."
“The housing market is a double-edged sword. No doubt its consistent climb has helped support confidence, but when the regulator, banks and the Government all look at tools to slow it further I think we can all agree it is in undesirable territory at present.” – John Kensington, KPMG
This morning's financial stability report does warn of declining marginal benefit in further tightening LVR restrictions, with respect to financial stability and house price sustainability, and instead suggests debt-to-income limits would be the best medium-term option to restrain house prices.
"In terms of new tools, our assessment is that a debt serviceability tool would be the best option for supporting financial stability and sustainable house prices over the medium term," the report says.
"Restrictions on interest-only lending would likely have less impact on overall lending conditions than alternatives, while being challenging to implement and enforce.
"Our analysis of these options is still being completed. Additionally, the appropriate policy response depends on economic and financial conditions and may change with circumstances. Implementing new tools such as restrictions on debt serviceability or interest-only lending is complex and would take time to work through."
By removing residential property investors' ability to claim back their mortgage interest payments against tax, it's thought the Finance Minister Grant Robertson has shifted the gear lever down to slow the growth of housing prices.
Now, he expects the Reserve Bank to do its bit – even if that just means taking the foot off the accelerator.
In the first such use of his Reserve Bank Act section 68B statutory power in February, Robertson directed the Reserve Bank to take into account house prices in managing the economy. Beginning today, the bank explains how it will do that.
The (deputy) emperor is naked
Bascand turns up to the select committee today like the Emperor, naked. The Bank is delaying its detailed response to Robertson's section 68B direction until later this month. But unlike the Emperor, he will know he is naked. The bank has chosen to leave itself exposed to criticism by turning up today without a full response to the minister.
The financial stability report discusses how tools like restraining debt-to-income ratios, and interest-only loans, might supplement existing loan-to-value ratio limits, to rein in property speculators.
It will consider that some of that work is already done by the Government, in removing the tax deductibility provisions for interest payments on residential rental properties.But also this month, the bank is expected to update research on debt-to-income levels. Its most recent data, from the end of 2020, shows banks are willing to lend owner occupiers 5.3 times more money than they earn. That's up from a 4.8 multiplied in 2018.
"Despite this, average debt servicing as a share of the borrowers’ incomes has fallen on average, from 39 to 35 percent, reflecting the decline in mortgage lending rates over the past two years," the bank says.
"A lower debt-servicing ratio implies borrowers would have a higher capacity to absorb declines in income or increases in expenses, after making their loan repayments."
Despite the Reserve Bank reintroducing loan-to-value lending limits earlier this year, high loan-to-value ratio lending still increased to $842m in March alone. Extraordinarily, for high-risk lending, that makes it the third highest month in the past seven years.
In total, new mortgage commitments rose to a record $10.5 billion in March. More than half of that ($6.3b) was to existing owner-occupiers buying new homes, an increase from $4.5b in February.
But the lending to first homebuyers also increased, from $1.2b in February to $1.8b in March. And notably, lending to investors, before exemptions, continued to rise from $1.9b to $2.3b in March. This last figure might might be expected to start dropping now, with the interest deductibility provisions coming in – but that will make barely a dint in New Zealanders' overall mortgage indebtedness.
Analysis by Canstar suggests it takes a couple more than twice the time to save a 20 percent deposit now, than it did five years ago. That assumes the couple are able to save 25 percent of their after-tax income, and that property prices continue to increase at the same rate they have over the past five years: nearly 9 percent across New Zealand, and more than 6 percent in Auckland. Under this scenario, it will take a couple nearly 14 years to save a deposit, compared with nearly six years in 2016, Canstar warns.
KPMG reported back on its Financial Institutions Performance Survey this morning. It says the housing market shows no signs of cooling.
Lending had continued to rise, it confirmed, up 1.78 percent to $447 billion in the last quarter of 2020.
“The housing market is a double-edged sword,” said John Kensington, KPMG’s Head of Banking and Finance.
“No doubt its consistent climb has helped support confidence, but when the regulator, banks and the Government all look at tools to slow it further I think we can all agree it is in undesirable territory at present.”
All the major banks reported loan growth over the 12-month period ending December 2020, with locally-owned Kiwibank outperforming the pack and growing by almost 11 percent.
That contributed to bank profit for the quarter - up by 35 percent against the previous quarter - rising from $1 billion to $1.36 billion.
“Much of the improvement stems from lower impairment charges (or, in some cases, reversals) in the quarter, reflecting how the current credit quality of lenders’ books is significantly better than where they were predicted to be,” said Kensington.
It's not just lending that continues to rise: CoreLogic published their monthly statistics overnight, factoring in the Government's housing reform and interest deductibility package for the first time. Despite those regulatory changes, property values nationwide rose by 3.1 percent in April – more than they rose the previous two months.
That increased the annual growth rate to 18.4 percent, and lifted the average national house value to $871,375. All the main centres had annual increases of more than 15 percent in the year to April. Auckland region was up 15.6 per cent to $1.24 million.
Of the big cities, the Wellington region rose fastest with annual growth of 23.7 percent taking prices to an average $971,393. But the sharpest increases were in provincial areas: Gisborne, Kapiti Coast, Whanganui, Napier and Palmerston North all had annual value gains of more than 30 percent.
