Banks pare back on high-LVRs

Business

Latest bank disclosure statements show some of the big five have drastically reduced their proportion of low deposit lending

27th May 14, 9:19am by David Hargreaves

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

The Reserve Bank's requirement that no more than 10% of new mortgage lending be to homeowners with less than 20% deposits has had a big impact on the overall high loan-to-value mortgage figures for the big banks.

The big five banks: ANZ, ASB, BNZ, Kiwibank and Westpac have all just released their general disclosure statements for the March quarter.

The documents show that some of the banks - and the market heavyweight ANZ particularly stands out - have sharply reduced their overall exposure to high-LVR lending.

The table below shows the amounts the banks had outstanding in high-LVR mortgages as of March and compares this with the figures as of December and September - immediately prior to October's introduction of the LVRs.

Bank	High LVRs March	% of total	High LVRs Dec	% of total	High LVRs Sept	% of total
ANZ*	$11,361	19.4	$13,066	22.6	$12,883	22.8
ASB	$9,127	22	$9,379	22.7	$9,592	23.5
BNZ	$3,826	12.8	$4,203	14.2	$4,497	15.2
Kiwibank	$2,274	16.8	$2,404	18.3	$2,385	18.8
Westpac	$8,212	21.3	$8,431	22.2	$8,536	22.8

All mortgage figures in millions. All figures are"on balance sheet exposures". *NOTE: ANZ has made a slight change to its LVR bands since December. (It now has an "exceeds 80%" band rather than "80-89%" as before). The March and September figures include the new method of banding but the December figure has not been adjusted.

Figures released by the RBNZ recently covering the first six months of the LVR regime showed that in aggregate the banks very easily came in under the 10% high-LVR 'speed limit'.

In fact during that six month period new bank commitments to high LVR customers represented just 5.6% of all new mortgage finance, after exemptions.

This has led to a substantial rebalancing of the banks' overall mortgage portfolios as fewer new high LVR mortgages are created and presumably many existing loans get re-categorised as low LVR loans following either a reduction in principal or an upward revaluation of the property.

The most spectacular move has been by the ANZ, which has seen its high LVRs exposure drop from $12.883 billion as of September to just $11.361 billion in March. That's a whopping $1.522 billion, or 11.81% reduction in its high LVR loans outstanding.

This in turn has dropped the overall percentage of ANZ's on-balance sheet mortgages that are in the high-LVR bracket to just 19.4% of the total down from 22.8% in September.

The BNZ, which already had the lowest proportion of high LVR loans anyway, has sharply reduced its share as well - in fact, in percentage terms by more than ANZ. The BNZ's $671 million, or 14.92%, reduction in categorised high LVR loans since September has seen its overall share of high-LVR loans drop to just 12.8% of the book from 15.2%.

ASB, which had the biggest proportion of high-LVR lending among the big five as of September, retains that position, even though it has shaved back its exposure somewhat. As of March ASB had $9.127 billion of on-balance sheet loans categorised as high-LVR, which represented just a shade under 22% of its total mortgage book. It has reduced the overall amount by $465 million, or 4.85% since September.

The reduction in the overall proportion of high-LVR loans being held by the banks will be welcomed by the RBNZ, which introduced the 'speed limit' restrictions after becoming concerned at the way banks were increasing their high-LVR lending - something that in the RBNZ's view could leave our banking sector in a more vulnerable position in the event of a substantial downturn in house prices.

But despite the fact that all of the banks have, to varying degrees, pared back their proportions of high-LVR lending, the fact is that all of them have achieved growth in their overall mortgage books in the past three and six months.

The table below shows the figures over the three months to March.

Bank	Total mortgages Mar	Total mortgages Dec	Amount increase	% increase
ANZ	$58,508	$57,877	$631	+1.09
ASB	$41,527	$41,227	$300	+0.73
BNZ	$29,820	$29,597	$293	+0.98
Kiwibank	$13,504	$13,118	$386	+2.94
Westpac	$38,566	$37,982	$584	+1.54

All mortgage and amount change figures in millions. All figures are "on balance sheet exposures".

ANZ, which had a spectacular December quarter in which it increased the size of its overall mortgage book by $1.3 billion - nearly as much as the other four banks put together - was again the overall leader in terms of net amount added in the three months to March - but less resoundingly so.

The ANZ saw the its overall on-balance sheet mortgage book grow to $58.508 billion, with a $631 million - or 1.09% increase.

This was slightly ahead of Westpac's $584 million gain to $38.566 billion - though Westpac's rise in percentage terms was somewhat more at 1.54%.

But staying with percentages, Kiwibank - which has recently received a capital injection from its parent company NZ Post - had the biggest percentage gain in size of mortgage book in the March quarter.

It had by amount the third biggest increase - $386 million - which was a 2.94% increase to $13.504 billion.

In the past six months Kiwibank has also had much the biggest percentage increase in its overall mortgage portfolio, climbing by 6.29% ($799 million).

In dollar terms ANZ's the way-ahead leader with a thumping $1.927 billion increase (3.41%), followed by Westpac with a $1.061 billion (2.83%) gain.

Both in numerical and percentage terms BNZ had the smallest growth, with a $320 million (1.08%) increase in size of mortgage book.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

18 Comments

by FromAnotherPlanet | 27th May 14, 8:44pm 1401180242

I am surprised that very little is said in regards to how lending behaviour by the banks may have influenced house prices over the last 3 to 4 years.

For the last 4 years, NZ has had historically low interest rates. This allows lenders to do the following.

1. Extend higher levels of debt to customers as they are now able to service this debt at these low levels

2. By virtue of the above, allow customers to gear themselves up with high ratios of debt.

We now have the following situation. Suppose we have a buyer with a 50k deposit. Under "normal circumstances" the buyer would probably only borrow 80% ($200k) and have $250k to play with. Under the ultra low interest rate environment the borrower may now borrow 90% ($450k) and now have $500k to play with.

It doesn't take much to see how the simple dynamic described above could lead to inflated sale prices.

Banks are responsible lenders. They will lend if they believe you will be able to repay them. They however have their profit targets. Bonuses and pay increases are linked to how far they exceed their previous profit (which was probably already a record profit). To meet these targets, management effectively force their staff to push as much debt onto consumers to get the required revenue to meet these targets.

Rather than saying, "Past record profits are due to a strengthening economy and housing market", should we be saying, "Past record profits are mostly due to more mortgage debt being pushed onto consumers, which have led to increased sale prices, as a result of the low interest rate environment".

If the dynamic described above is even partly true, this will mean the recent LVR restrictions are probably more powerful than we realise. In a extreme example let us have Buyer 1 who bought a house @ 90% LVR. Buyer 1 will now only be able to sell to buyers @ 80% LVR. Remember the situation described previously with the $50k deposit? One has $500k to play with, the other $250k.

Interesting times ahead.

by dh | 27th May 14, 10:29pm 1401186591

The problem with that idea is that the total value of mortgages in raw dollars has only increased a tiny bit compared to the amount that housing value has increased.

https://www.dropbox.com/s/s3mjn3gu6h9jzt9/mortgageVsHousing.png

there is not enough mortgage (and thus bank loaning) to pay for the price increases by a long way. as a p.s. the vertical axis is millions of dollars (I made the graph quickly and forgot to label it).

by Henry_Tull | 27th May 14, 11:45pm 1401191115

financial system activity is not steady state, equally financial system oversight (management/regulation) would not appear a job of set and and forget.

for example from a regulators direct perspective:

http://en.wikipedia.org/wiki/William_K._Black

and the TED video within:

http://www.zerohedge.com/news/2014-05-25/bill-black-robbing-banks-inside-weapon-choice-accounting

by FromAnotherPlanet | 28th May 14, 7:00am 1401217248

Would you be able to tell me how the 'Value of Housing' is measured? At any moment in time, only a small proportion of housing stock is bought and sold. I am not convinced the houses sold/built over the last 10 years would have added that much to the value of housing.

by dh | 28th May 14, 7:25am 1401218747

Reserve bank key graphs.

by Roelof | 28th May 14, 9:17am 1401225421

DH... I look at total credit growth... or money supply growth... Money is homogenous... It does not matter HOW it enters an economy... it can still end up purchasing Real Estate and driving the mkt... ( One mans debt becomes another mans income)

Don't u think...???

eg.. Govt borrowing ..and spending ends up as someones income... which can be used to purchase Real Estate. Its impossible to know how someones borrowings will flow thru an economy..??

by FromAnotherPlanet | 28th May 14, 6:57pm 1401260228

dh, thanks for the RBNZ pointer. Below is the description of the 'value of housing stock'

Sales data from each quarterly period for each TLA are used to adjust the full property database valuation. The total net sale price (after editing) of all property sales of the listed residential categories is divided by the total CV of the same properties sold in a quarter, producing a ratio for current value against CV at the time of regular assessment. The ratio arrived at is applied to the entire stock of CV values for each TLA. Results for each TLA are aggregated.

Now applying the above logic to my earlier extreme example:

1. Person buys house with $50k deposit @ 80% LVR ($200k borrowed). The value of the 10 similar houses in the street will be calculated at $2.5m

2. Person buys house with $50k deposit @ 90% LVR ($450k borrowed). The value of the 10 similar houses in the street is now $5m.

Proving anything about the sale price of houses based on the "value of housing stock" does not make sense. The "value of housing stock" IS calculated the sale price of houses.

The logic we should be analysing is, does mortgage growth lead to sales price growth. Sales price growth by math will increase the "value of housing stock". You have done a naughty thing by leaving out the house price % change which is on the original graph on the RBNZ website.

by dh | 28th May 14, 7:55pm 1401263754

The thing is, if you extend back in time further (admittedly you run out of data in the 80s) the pattern of raw numbers is the same - the value of housing stock was 4 times the value of mortgages, and something massively distorted matters from 2001. there are a number of ways of testing it and they all show the same pattern. Even the Reserve Bank has noted that in the 2002-2006 period assets unusually appreciated without debt rising (though they don't speculate about reasons).

An the thing is, in every other countries that I have actually been able to find good housing debt information for they actually show a very different pattern house values rise, and mortgage debt rises by the same amount after a slight lag. The reverse is also true in other countries, as housing values have dropped so has total mortgages (after a lag). Adjusting for the year or so difference, the dollar amount that house prices increased was within 5% of the dollar amount that mortgages increased. This was even the pattern in NZ up till the early 2000s.

As an aside, I've said it before I would love to track down a national Australian series, but the only one seems to be the capital cities series, which is not actually the same thing as national one.

now it is possible the NZ way of measuring it's housing value was mysteriously changed in the early 2000s to a method that is rubbish compared to other countries, or it is possible a bunch of extra money entered the system from elsewhere (a bit of both are actually possible, too). But there is no evidence of it being the way we measure things.

I suggest you take the C8 mortgages data from the Reserve Bank, and do a subtract one year for the next to get the amount of changes in house mortgages from year to year. now take the value figures and do the same. even if the value is a multiple based on extrapolating sales in some manner different to every other country (and I would note that this would mean a massive cut in estimated household wealth) it should be a consistent relationship between the two. run a linear regression on the two, or if you aren't comfortable with that just make a graph with time on the x axis and the year on year changes as two lines.

by dh | 28th May 14, 9:25pm 1401269131

this was a it of a mistyping on my part, it was that assets increased dramatically compared to debts. I'm doing some heavy duty data matching to deadline through this evening, and am not looking things up, just replying from memory when the computer is talk half a minute to run some code. that said, I have just found the most stupid yet elegently effective matching criteria on some data, but it is not something I can really talk about, just feel really smug at having cracked it.

by dh | 28th May 14, 10:06pm 1401271584

Basically because house prices had inexplicable increased a lot more than debt, we were all nett richer.

by Simon | 28th May 14, 10:16pm 1401272174

Volume of sales need to occur at new house price levels to churn through enough mortgages to match the increase in housing stock values. If house prices froze at current levels, household debt would keep rising for years playing catch up. Volume sold (as a percentage of total number of houses) might be the missing piece of the puzzle

by Simon | 28th May 14, 11:10pm 1401275455

What if you multiply household debt increase over a given year by total number houses in n.z then divide by number houses sold in that same year. Prehaps a x20 multiple at a complete guess. Would this make debt figure match increase in housing stock value for that given year?

by dh | 28th May 14, 11:27pm 1401276420

The thing is, if it is correct, and you apply the same methodology to other countries, then their numbers will be out. the consequence of being right here is the necessity to massively downgrade New Zealander's nett wealth compared to other countries. this is not something I see hapeening in an election year. Or any year.

You don't actually need to work out the multple to test it though. You just see if the times when the ratio of period on period increases in debt compared to house prices matches the times when house prices change and they consistantly change in the same direction (and that fairly simple if you have access to the house sales data).

For what I'm talking about internationally, I managed to find this old graph from when I started gathering country data. Now, looking at this people may just go "Oh, that's just Ireland" but each country I found data on since then that had a housing boom has had Ireland's pattern, overbuilding or not. New Zealand is the outlier (and maybe Australia, there is no good time series data on national house values one way or the other to say).

https://www.dropbox.com/s/0eozc73hwfspo8x/IEandNZ.png

Now notice the way (top line) Ireland's (and other countries) debt tracked up at the same rate as housing values (the same slope line). If you add together the year on year increases (shown in the bottom line), just after the top of the boom (when things are flat) the absolute amount of the cumulative increases in house value through the boom is within 5% of the amount increase in debt. This is a standard pattern. But not NZ.

Now, I don't have any answers to this one, but it seems to me either the way we calculate houses is wrong compared to every other country (which has it's own follow on implications), or there has been money entering the system that has not come from debt. And it hasn't come from household assets either, as there has been no noticible drop in other assets at times when prices surge (which would have indicated a large scale movement from one asset class to another).

by FromAnotherPlanet | 29th May 14, 6:35am 1401302123

The calculation of the housing value looks at QV's as the baseline value of property. These are revised every 3(?) years. I think this revision which is in general is always going up is where mostly where the new (perceived) wealth is coming from. We need a better understanding of the value of housing stock calculation that Quotable/RBNZ use.

I would now lean towards the interpretion of the "value of housing stock" numbers currently used as being the "perceived value of housing stock" i.e people base value on their QV with adjustments for recent sales. There needs to be a different method to get the real "value of housing stock" that allows us to do the analysis we want done

by Simon | 29th May 14, 10:25am 1401315914

I guess you can increase the total value of housing stock 2 ways. Increase price of existing stock. Or build new houses (increasing number of houses).

This data doesn't separate the two, so hard to tell where the extra value is coming from exactly in either the NZ or Ireland cases.

NZ doesn't build much, while Ireland was building 75k a year during their boom.

Increased value by new building will see debt rise with it (debt for developer and then for the new home buyer, if developer uses a set lending margin he won't use sale proceeds to pay off debt, but rather use it to borrow more to build more, creating viscous debt growth cycle, until it crashes as in Ireland). Increased value by increased prices of existing stock will see growth rates of something close to a 20:1 value to debt ratio.

When YoY price moves are very high, then value of stock rockets off without sufficient volume of sales to churning through to allow debt levels to catch up.

I think the things that are different in NZ's case are:

1. lack of new building (could look at % sales new v second hand). And lack of big scale developers leveraging up with money borrowed NZ banks (more likely from overseas).

2. % increases in house prices YoY versus number of sales during that year.

20:1 ratio for n.z (houses: houses sold p.a), might be closer to 10:1 for other countries (and adding the new build factor get debt: value remaining relatively stable).

3. more foreign money being used to buy nz property.

by Simon | 29th May 14, 10:29am 1401316170

Overall, I think the difference you see with NZ are positives for NZ, and suggest a crash is less likely.

If we wanted to crash house prices you would do what Ireland did; Free up massive amounts of land for developers to build lots of houses on, have GDP growth and immigration increased by this same very house construction boom; then reach a tipping point where no more increases in building rates can occur = GDP drops = immigrants (poland I think they were in Ireland case) leave = fields of empty houses no one wants to buy = big price falls.

by FromAnotherPlanet | 28th May 14, 8:50pm 1401267012

dh, thanks for taking the time to respond to my rants.

I have to admit that I am at a loss at trying to understand the house sale price increases that occurred during pre GFC. I don't think the drivers are the same as that of our post GFC house sale price increases. I'm of the opinion that we have to try understand what else is happening at those specific periods rather than trying to apply a one size fits all approach to both periods when explaining house sale price increases.

I wasn't observing during the pre GFC period. I definitely was post GFC. And one of the major drivers that made sense was the idea of bank lending behaviour as being a possible driver of house sale price increases - you just had to see the media exposure ASB had when they wrote huge amounts of high LVR loans last year and had to cancel a bunch of pre-approvals (isn't ASB predominantly Auckland?). As for offshore money flooding the Auckland market, i been to more than enough auctions and to see how people can come to the idea of there being a foreign invasion.

I'm not willing to make a firm comment on the supply side of the housing market. I simply don't understand what the drivers are to people wanting to sell or, in our current situation, not sell their properties - I don't have the skin in the game to be able to understand the mindset of potential sellers of property.

One could say, "why sell when my house/s are gaining in capital so easily. I don't mind being cash flow negative as the mortgage repayments are so low". That is me purely speculating.

by Simon | 28th May 14, 10:31pm 1401273119

I think the unique thing about 2002-2006 period, and likely what we are again seeing during the recent boom is large price rises on relatively low volume.

That, together with how they calc housing stock value, explains why housing stock value can rocket ahead of house hold debt.