The capacity of home loan borrowers to borrow has dropped by about 20% over the past couple of years, mortgage brokers estimate

As lenders and regulators have tightened the screws, the borrowing capacity of people seeking and taking out home loans has declined over recent years. But by how much?

Analysts at Macquarie in Australia this week suggested borrowing capacity is down by between 15% and 25% since 2015 with changes in expenses recognition having a significant impact on owner-occupiers’ borrowing capacity, and debt commitments having a more significant impact on property investors.

Given the New Zealand residential mortgage market is dominated by four Australian owned banks - ANZ, ASB, BNZ and Westpac - has the same thing happened here? Broadly speaking the answer is yes, according to mortgage brokers.

"In 2015 lenders were testing [loan] servicing at rates around 5.50% and today that is around 7.50%," says Squirrel Mortgages' John Bolton. "Based on a repayment of $4,000 per month that equates to a 19% reduction in borrowing power. On top of this has been a focus on expenses and responsible lending, which has also lowered borrowing power - but [that's] probably not as prevalent as in Australia."

Andrew Perry of Your Home Loan says borrowing capacity in NZ has probably reduced by about the same as Macquarie's Australian estimate between the introduction of the investor loan-to-value ratio restrictions in mid-2016 and mid-2017. Perry says there has been a bigger emphasis on expenses with things like risk insurance, entertainment, school fees for public schooling, and childcare being covered.

"We were already tighter than Australia to start with so that makes us a much tougher lend. Also servicing rates have crept up by about 0.3% to 0.5% across the board," says Perry.

He says servicing raters are about 3% to 3.5% above what investors are actually paying, and about 2% to 2.5% above actual rates for first home buyers with a 10% deposit as lenders add low equity premium interest margins.

"The biggest impact on investors was when banks started taking into account the principal and interest payments at say, the servicing rate of 7.5%, rather than the interest only payments, at say 4.5%, on lending elsewhere which made sense," Perry adds.

He argues this has now gone too far with lenders wanting borrowers to provide a statement and loan term for all loans elsewhere and base repayments on that.

"So a 35 year-old borrower who is paying their loans down over a 20 year rather than a 30 year term is penalised [as] they are incentivised to put their loans on principal and interest for as long a term as possible, thereby paying more interest, in order to better meet bank affordability criteria," says Perry.

Bolton says NZ's Australian owned banks increased servicing rates as a result of attention from the Australian Prudential Regulation Authority. 

"The biggest change for us was the smaller NZ banks lifting their servicing rates in line with the big banks. Another big change was not allowing property investors to have existing loans tested on interest-only. It would be fair to say that between APRA and the RBNZ they have dictated credit policy such that all banks are largely the same now with only subtle policy variations," says Bolton.

What further impact might bank probes on both sides of the Tasman have?

Meanwhile, bubbling away in the background is the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the Financial Markets Authority (FMA) and Reserve Bank (RBNZ) probe into NZ bank conduct and culture. As reported by interest.co.nz in April, Australian-based UBS banking analysts and economists have suggested tightening of lending standards stemming from the Royal Commission could lead to a credit crunch and even Australia's Minsky moment.

"We think the Royal Commission is likely to recommend greater due diligence is required for banks to comply with responsible lending laws. Banks may need to undertake detailed assessment of customers' living expenses rather than relying on the Household Expenditure Measure benchmark [a benchmark banks use to estimate a loan applicant's annual expenses], while overstated income may require greater validation," UBS said in April.

Although noting Australian banks had already started improving their due diligence on borrowers' living expenses, UBS suggested the Royal Commission hearings imply this will have to go significantly further.

"While some may not be impacted by changes, e.g. low loan-to-income borrowers, many are likely to see a sharp reduction in borrowing capacity, particularly first home buyers who are 12% of total loans, and low income borrowers. Our scenario analysis suggests if home loans fell 20% in full-year 2019 then housing credit would slow to 0%. However in a credit crunch scenario where approvals fall one third, credit could contract 2% to 3% per annum. This could lead to Australia's Minsky moment," UBS said.

Named after economist Hyman Minsky, a Minsky moment sees a sudden major collapse of asset values sparked by debt pressures.

Australia's Royal Commissioner, Kenneth Hayne QC, is expected to issue an interim report by the end of September and final report by February 1 next year. However, there have been suggestions the timeframe could be extended. Here in NZ, a report from the FMA and RBNZ review is expected in October or November.

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24 Comments

"UBS banking analysts and economists have suggested tightening of lending standards stemming from the Royal Commission could lead to a credit crunch and even Australia's Minsky moment"

So I guess they want to keep throwing individuals borrowers who cant afford their loans under the bus to imminent foreclosures, to protect the asset values partially created by these irresponsible lending practices???

You only have to look at the recent failures at the Barfoot and Thompson Mortgagee auctions (last week's 80% failure rate) to see how silly previous lending had been. Anyone know if we have a date yet for the RBNZ to report on their 'behind closed door' investigations?

Those failed mortgagee auctions were shown as withdrawn. Does that mean the mortgagee was able to secure a last minute refinancing deal or did the bank pull the pin as they knew they would not recover enough from the sale to pay the outstanding balance and costs? With the likelihood of recovering the shortfall from the mortgagee being nil. Seems to be a few more mortgagee sales coming up in Auckland now. Partially completed developments and invester portfolios. Alot more properties coming on the market in the near future and a shortage of buyers. I expect HNZ is gearing up to step in as buyer of last resort. There will be a lot of upset existing owners of sections and townhouses when that happens.

It usually means they have been sold by negotiation post auction.

not necessarily.

Hi WestieAJ

They will have been withdrawn from the Auction but I hope not from the market. If that's the case then we are being seriously manipulated by the banks and moral hazard is dead and buried. In the UK post GFC it wasn't uncommon for borrowers who got into trouble to be offered extended loan terms and/or interest only mortgages to ease the pain where they would otherwise default. It served two purposes, 1. it allowed the banks to maintain a loan on the balance sheet (that they marked at book value) rather than have to sell the debt at a loss and 2. It kept large numbers of defaulting sellers off the market and stopped forced sales collapsing the market even further.

I would hate to think that this is happening here but the debt is controlled by the so few players, that who knows? it is definitely something that if I were involved at the Reserve Bank I would be keen to monitor during their review of practice as it only serves to keep the market artificial.

I pose the question, If you were a bank who had made hundreds of thousands of loans in a market that was competing with foreign cash that was no longer there and some of those loans had started to go pear shaped.. Would you stick a load of bad debt on the market at the same time, if you weren't forced to?

My guess is it will be the mortgages where there is equity in the transaction that will be most at risk of foreclosure than those that are mortgaged to the hilt with no equity. But maybe I'm a cynical sod who has seen too much in the past.

The ability for banks to "extend and pretend" loans to keep loans as performing loans (as compared to non performing loans) depends upon the economic circumstances and the bank's circumstances.

Given low levels of unemployment, an economy that is still growing, low interest rates, then the banks may be able to do this for a period of time.

Not sure how they could continue to do this in a recessionary environment when unemployment increases to a high level, even at low interest rates. If a household experiences a significant reduction in income, then at some point the banks will be unable to extend and pretend as the debt service payments cannot be met. Especially given the high valuations of property in some parts of the country - in Auckland for example house price to income ratios are currently almost 150% of the peak before the GFC in 2008.

The extent of the banks willingness and ability to "extend and pretend" the loans will determine the magnitude of the property price falls. I heard that during 2008 / 2009 there were some loan extensions, and some banks allowed some borrowers to go from P&I to IO for a period of time, and as a result were able to ride out the GFC. Others where the banks played hardball were unable to ride out the GFC and were forced to sell their mortgaged assets to repay bank loans - note that the number of mortgagee sales increased significantly in that period, and some assets were sold at distressed price levels, given the property market conditions at the time of sale.

The current tightening of loan criteria by banks has resulted in some credit restrictions and has adversely impacted property prices in some areas. Remember this is in a strong economy with low unemployment, and low interest rates. As more interest only loans move to P&I loans, this may put some households under financial stress.

The banking system has a loan to deposit ratio of 129% which means that the banks require 29% of their assets (i.e loans) to be financed from non deposit sources. That is $110bn of bank's source of financing from non deposit sources (i.e debt securities). - https://www.rbnz.govt.nz/statistics/s10-banks-balance-sheet .

Depending upon the confidence in capital markets, if this dries up, then the banks might face liquidity pressures. Not sure how much of the bank issued debt securities are owned by NZ residents vs non residents. Non residents may choose to move their funds offshore and not buy newly issued bank debt securities where the funds go to repay maturing bank debt securities (especially in light of rising interest rates for USD cash, and a weakening NZD FX rate means that USD denominated investors may have some exchange rate losses on their NZD denominated bond investments). Banks can pledge mortgages to the RBNZ for their liquidity needs, however this assumes that the portfolio of mortgages are of high quality (low LVR's, high debt payment coverage ratios ). If the banks have been a little too loose in their loan underwriting, then that is a smaller pool of assets that they can provide as loan collateral to the RBNZ. As a result of a tighter funding environment for banks, this might result in higher interest rates or a broader credit crunch as loans get called in, maturing interest only loans don't get renewed & credit lines get reduced.

The asset liability duration mismatch is one risk that banks face in their business model, however by taking their loan to deposit ratio in excess of 100%, they are now exposed to capital market conditions. The higher the loan to deposit ratio for a particular bank, the higher the bank's sensitivity to capital market conditions. Capital market conditions can change very quickly and unexpectedly as recent experiences with the Turkish Lira and Argentinean Peso have illustrated. Northern Rock in the UK and the Irish banks were reliant upon capital markets for the funding of their loans and when their source of funding stopped, the subsequent credit crunch adversely impacted the local economy.

The non bank financiers do not have access to these sources of liquidity from the RBNZ and might face pressure. Borrowers from these sources might face a credit crunch if they have an inability to refinance elsewhere.

No one is "throwing anyone under the bus" if some choose to carelessly/blindly cross the road, it's their fault. We all make our own lives and we have to live by the consequences

Indeed and they are already doing that and tightening up. I haven't had a need to borrow for a good number of years, but I always like to know and keep abreast of how much I could borrow should a suitable opportunity present itself. Without any change to my circumstances my borrowing capacity in September 2018 is about 82% of what I would have been able to get my hands on in November 2017.

Credit limits are reducing and availability is getting tighter, the knock on effects of heavilly reduced asset prices will be unavoidable.

(partial repost from yesterday)

Agreed, asset price reduction is a logical impact from a reduction in cheap credit. That said the last 10 years of print, pray and prosper (for the banks and specudebtors) has been anything but logical.

Print and pray. Very nicely coined Averageman :)

Andrew Perry of Your Home Loan says borrowing capacity in NZ has probably reduced by about the same as Macquarie's Australian estimate between the introduction of the investor loan-to-value ratio restrictions in mid-2016 and mid-2017.

That would seem to explain Auckland's very slow sales volumes over that period then (especially when coupled with China's limiting of capital outflows).

Of course it will. 3% was the biggest lie from the last Govt, while they oversaw NZ being sold out from under itself.

I think you mean re-colonised!

It was a huge government sanctioned wealth transfer. A turning point in NZ's history.

Meanwhile, our banks are lining up to throw money at first home buyers who have no deposit and low incomes, otherwise known as Kiwibuild buyers - all encouraged by the Government who will wear no responsibility when these borrowers get into trouble.

Do you have any evidence to back this up? They have said they MAY lend up to 95% for qualifying buyers.. but i'm pretty sure the qualifying bit is the issue, the criteria is no longer based on the ability to fog a mirror.

And as for the deposit.. most will have been in Kiwisaver for the last 5+ years.. so its more likely to have somewhere between 10 and 20% deposit if they are earning enough to service a mortgage.

Well if the article is correct, then the NZ banks are in much stronger shape.

So, how will the banks achieve loan growth if they can no longer depend so much on compounding mortgages?

Maybe they could try lending Sme's money and support something productive ?
YeahNah.

They'll reposes the property and wait. There's still 56 million Chinese millionaires that want to get out of China.

Ultimately the reduced borrowing power will feed into lower house prices or lower rate of increase prices.
Unless the foreign buyers keep buying via various legal domestic proxies.

According to this from Stats NZ:
Around 71% of companies in New Zealand have no (paid) employees, that means around 375,000 of the 530,000 odd companies have no (paid) employees.

A bit over 500,000 properties in NZ are owned in part or whole by companies, representing just under 23% of all properties. Property being land parcel, so anything from a section to a farm or whatever.

Housing NZ manages a bit over 60,000 properties.

Also from Stats NZ:
There were 29,655 farms that had at least one beef cattle and or at least one sheep in 2016, but this number was down 29.4 percent from 42,015 in 2002

Muse over those numbers for a moment.