Low interest rates and modest drawdown growth are revealed in a detailed look at the components of our home loan market

By David Chaston

In the year to March 2017, banks charged mortgage borrowers $10.8 billion in interest. But that was the lowest dollar amount, at the lowest interest rate, since this [short] data series has been available.

The RBNZ data report C35 allows us to follow the money flows though the bank mortgage market.

This is a view that strips away some of the myths that have built up. But it also allows us to focus on what is really going on in this market, one of the largest in our economy.

As at March 2017, homeowners and investors had borrowed more than $230 billion against our residential housing.

Overall, this is 'only' about ~20% of the value of all housing and land used for residential housing. (The RBNZ has changed the way it reports this 'value'. In its C22 report on the comprehensive household "balance sheet" it reveals this value as $751.5 bln as at September 2016, but it now excludes from that the values owned by property investors because they are "notional businesses" and that data is now rolled into the business asset category which is not as transparent. Our estimate is that the total value is now about $1.1 trillion, but this is really just a guesstimate.)

Residential mortgage loan reconciliation
All mortgages
year to ... March 2015 March 2016 March 2017
  NZ$ bln NZ$ bln NZ$ bln
Opening position 187.981E 197.563 213.704
+ Drawdowns 58.602 72.985 74.539
+ Interest charged 11.283 11.621 10.805
- Scheduled repayments -15.240 -15.260 -15.660
- Repayment of loan in full -31.805 -38.501 -36.816
- Other excess repayment -13.729 -14.866 -15.515
+ Repayment deficiencies 0.222 0.252 0.289
- Net write-offs -0.064 -0.057 -0.025
+ Other adjustments 0.313 -0.033 0.038
= Closing position $ 197.563 $ 213.704 $ 231.359

In the year to March 2017, borrowers drew down $74.5 bln in new loans, which was actually only +2.1% more than in the previous year. Most readers will be surprised to know that this drawdown growth was so low and in fact less than GDP growth. The real drawdown growth came in the previous year to March 2016 when it shot up a remarkable +24.5%.

And borrowers paid $10.8 bln in interest in the year, which based on the loan balances at the start represents an overall interest rate of a bit less than 5.1%.

One set of borrowers came to the end of their mortgage contract, paying off their loans in full. These 'final' transactions exceeded $36.8 bln in the year.

The remaining borrowers were committed to paying $15.7 bln in contract repayments of principal. However many of them made additional principal repayments and in surprisingly large amounts, chopping into their liability by an additional $15.5 bln in repayments greater than the minimums required.

However, there were a few borrowers - actually a surprising few - who couldn't make the minimum repayments, and they fell short by $289 mln. This represents only 0.14% of the total mortgage liability, the lowest proportion since this series began. There is no evidence of mortgage stress in this data.

The actual data is in much more detail than summarised above.

In fact, you can separate out this loans that have a high loan-to-value ratio (LVR) of 80% or greater.

Residential mortgage loan reconciliation
Mortgages over 80% LVR
year to ... March 2015 March 2016 March 2017
  NZ$ bln NZ$ bln NZ$ bln
Opening position 35.422E 30.292 27.615
+ Drawdowns 7.497 9.272 8.322
+ Interest charged 1.856 1.648 1.262
- Scheduled repayments -2.355 -2.028 -1.666
- Repayment of loan in full -5.993 -6.297 -5.222
- Other excess repayment -1.292 -1.264 -1.122
+ Repayment deficiencies 0.046 0.048 0.044
- Net write-offs -0.031 -0.027 -0.015
+ Other adjustments -4.861 -4.030 -9.469
= Closing position $ 30.289 $ 27.614 $ 19.749

This subset of high LVR lending shows it has fallen from 15.3% of all lending in 2015 to just 8.5% in 2017, a shift that is almost a halving.

This is confirmed (in the line "Other Adjustments") that borrowers are clearing out of this category quickly and into loans that are below 80% LVR.

But surprisingly, borrowers in this class are not paying any interest rate penalty, on average. The implied interest rate in the year to March 2015 was just 5.24% and that had shifted to 4.57% in the year to March 2017. I wasn't expecting to find that.

Another somewhat unexpected finding is that the stress indicator - "Repayment deficiencies" - is not materially higher than for the overall level and in the year to March 2017 was only 0.2%.

Even this group of borrowers was able to make "Excess repayments" of $1.122 bln in the latest full year which was two thirds more than the committed regular repayments.

But these borrowers bailed out of their loans at a slightly faster rate than those with a lower LVR mortgage. In fact 18.9% of these types of loans were ended and repaid in full in the year to March 2017, which compares to 17.2% overall.

The overall view from this industry-wide data is of a healthy mortgage book with little sign of stress. Of course there will be exceptions and those anecdotes can generate headlines. But they are certain to be the exceptions.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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So the house price hyperinflation in NZ is being driven by factors other than domestic mortgage borrowing?
No surprise that NZ mortgage borrowers are overpaying their mortgages as they are paying relatively high interest rates - compared to most other developed countries.

No, I think this shows domestic mortgage borrowing is a large part of the problem. The difference between opening and closing positions over the year is about 6.9% of GDP, greater than the nominal percentage increase in GDP. Surely creating $18B of new "money" and biffing at the housing market does make a difference?

Total value of all housing - (new mortgage borrowing + existing equity) Still leaves a big gap of housing that has been financed by some other means.

forgive me for stating the obvious but it could have something to do with the billions of dollars of foreign money that, up until recently, poured into the Auckland housing market. Here's a specific of a 1.95 million dollar injection into the economy that probably didn't originate from NZ banks https://www.youtube.com/watch?v=e7I5rPqf6Tc&t=314s (Too bad for the doctor lawayer or accountant or engineer New Zealander who wont be able to own that house anymore)

Can you explain your maths/sources?

As I read it, debt grew by $18b, or roughly 8.5%.

According to REINZ, house price index moved 7.8% 12m ended April.

So what's the big gap?

The RBNZ shows housing mortgage debt growing at an average of over 8.8% for the past year - that's through the banks etc so excludes loans from mum and dad. Total including consumer debt posted a new record total of almost $250,000,000,000 or roughly equal to current total annual GDP (turnover) Combined with business and agriculture another new record of $412 billion so obviously growing much faster than nominal GDP growth of 5% or less. Agriculture debt growth has been quite low (4% or 5%) but nevertheless total debt (excluding government) went from 384 billion in March 2016 to 412 billion this year.
We bunged 28 thousand million of freshly minted new "money" into our economy last financial year. That's not even remotely sustainable and what happens when we stop or slow down even. It looks like we (or the government) will have to keep on doing it or we fall into a deep consumer driven recession or worse.

http://www.rbnz.govt.nz/statistics see C5 historical

Er, "overpaying your mortgage" in this context means that borrowers are paying down more quickly, a factor of historically low interest rates for NZ. That's not a bad thing - and part of the reason there's a shift from high LVR to low LVR

Remember, NZ's high interest rates v OECD countries also applies to deposits... so there are plenty of people happy about that.

Very surprised to see how healthy borrowing is; Above minimum loan repayment and very few mortgage defaults are very good

After viewing these figures I couldn't help but think about the number of people finishing their mortgage payments and those who have sold up and entering into retirement units and/or other types of elderly care......the RBNZ has been fighting deflation for the past 10 years........ create scarcity of supply, create tougher conditions for entry.......what's that about saving the bacon.......who's bacon was it?