As the rate of mortgage borrowing growth continues to slow sharply, David Hargreaves ponders on what level of growth the RBNZ would be content with

By David Hargreaves

The rate of growth in mortgage borrowing is continuing to slow sharply.

A bit of crunching of the latest Reserve Bank figures monitoring sector credit shows that in August the annual rate of growth in mortgage borrowing dropped to 6.9%, which is the lowest rate of annual growth in nearly two years.

Since the RBNZ unfurled the blunderbuss of 40% deposits for housing investors, unofficially from July, officially from October last year, the impact has been dramatic.

Add in the effects of more capital constraints from the Australian banks stemming from requirements over the ditch, the squeeze resulting from declining deposit growth rates, and the move by the big banks to 'ration' credit and the money is certainly not flowing to the would-be borrowers like it was.

The 6.9% annual growth rate in mortgages for the 12 months to the end of August compares with a 9.3% growth rate for the year ended December 2016 - which happened to be the peak of the current cycle.

Percentages in isolation can be meaningless and paint misleading pictures. So, to put this in dollar terms, in the 12 months to the end of August 2017, the amount outstanding on mortgages in New Zealand rose by $14.962 billion (to a grand total of $239.365 billion). In the 12 month period to the end of 2016 the total amount borrowed rose by some $19.614 billion, while in the period from August 2015 to August 2016 the total grew by $18.808 billion.

So, comparing apples with apples, the total amount of mortgage money outstanding rose by some $3.846 billion (20.4%) less in the last 12 months (to August) than it did in the previous 12 month period to August 2016.

All things are relative of course. Go back to August 2011 and the annual rate of growth in mortgage borrowing was just 1.3% - the dollar amount rose just $2.88 billion in that 12 month period. But those were not good times. It was the post-GFC, post-early 2000s housing boom hangover.

Things really started cranking up again in 2012. Between August 2012 and August 2013 the annual rate of growth in mortgage borrowing more than doubled from 2.5% to 5.6%. It was during this period that grumbles started emerging from the RBNZ about the growth in credit.

And indeed it was October 2013 that saw introduction of the first round of LVR measures. This did check credit growth, with the annual growth rate dipping from 5.9% as at the end of 2013 to as low as 4.5% by November 2014.

However, in the immediate aftermath of the 2014 election, and resumption of the National-led status quo, things went nuts and the credit growth annual rate had more than doubled, to 9.1% by August 2016.

Perspective

It is worth putting even the 9% growth figures in some historic perspective, however.

The RBNZ's been breaking out the mortgage figures alone only since 1999. Those very first monthly figures in the series saw annual mortgage borrowing total growth of 10%+, dipping down to a low of 6.6% in early 2001 before rising into double figures again by early 2003.

The annual growth rates then stayed in double figures right through till April 2008, with a peak of an eye-watering 17.5% growth in the 12 months to April 2004.

If we look at the longer RBNZ series, dating back to 1991 and which takes in consumer borrowing as well as mortgages, the annual growth figures there were in double figures all the way from 1991 through to mid-1998, briefly back in double figures in 1999 and then again from 2003 through to early 2008,

All of which raises the question of where the RBNZ would be comfortable with credit growth rates sitting.

Indebted

What the growth rates don't tell us of course is how indebted people are.

Well, we know separately from the RBNZ's key household financial statistics series that, including rental properties, household financial liabilities as a percentage of household disposable income are currently at a record high of 168%. At the start of this century this ratio had just pushed past 100%.

So, clearly the extent to which household finances could bear continued fast growth in mortgage borrowing would appear more limited compared with years ago. Or, certainly, the RBNZ would be less tolerant of it.

Given the current slowing trend in monthly mortgage borrowing and the uncertainty both in the run-up to and now post the election, it would appear almost certain those annual growth figures in mortgage borrowing will slip further, most probably below 6% and even possibly below 5%.

It's informative perhaps maybe that the first wave of LVR measures were implemented when the mortgage growth rates were heading toward 6% - and that they subsequently fell back to the mid 4% range.

Uncomfortable?

Might this perhaps suggest that the RBNZ gets increasingly uncomfortable with growth rates in excess of 6%?

If that is the case, what's the view then once we do - if we do - see the growth rates start to slip below 5%? If a reduction from growth rates of 9% to 5% is good, are we saying it's still good when those rates are down to 1%?

I suspect not.

Watch this space then. Because once we get to the other side of Christmas the pressure is likely to build on the RBNZ to ease up on those LVRs.

The current trend of the figures suggest that the RBNZ needs to keep a close watch. Because if you squeeze all the life out of something, it can take a while to recover.

There's certainly plenty to think about.

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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14 Comments

Auckland's turnover rate of housing stock has currently slumped below 4 percent, the RBNZ should continue to squeeze . When we look at credit/mortgage debt 'growth' particularly on a regional basis, surely the 'growth'. is linked to the increased turnover of property, speculation/selling property to one another fuelling higher prices more debt, but at some point there are insufficient willing participants, which appears to be todays case The problem for the RBNZ is that mortgage debt has been incessantly skewed towards one region for two decades .Its ability to raise/lower rates is constantly challenged by the preponderance of Auckland's debt. Why not have regional mortgage rates, encourage growth ex Auckland, what is good for Auckland may now no longer be good for the remainder of New Zealand.

Underwriters could just apply those kind of rate adjustments based on the legitimate risks that different regions represent as part of their usual assessment of value to risk when lending.

Residential property capital risk weightings at 100%+ for Auckland should suffice in the first instance.

Wasn't the the first order RBNZ issue to protect the banking sysytem, i.e. the home loan lenders from over lending for our sake.
The borrowers condition was/is of lesser concern to them.

Maybe think through what an underwriters ususal assessment of VaR procedures are. Talk to the models!

When we look at credit/mortgage debt 'growth' particularly on a regional basis, surely the 'growth'. is linked to the increased turnover of property, speculation/selling property to one another fuelling higher prices more debt, but at some point there are insufficient willing participants, which appears to be todays case

While I don't believe you have any "evidence" on the behavior of the punters besides the banter you may have picked up at the BBQ (which is not "evidence" in any meaningful sense), it is good you raised this and one of the biggest unknowns is the behavior of the sheeple. Central banks are practically in the stone age when it comes to modelling behavior based on their pulling of levers and attenuation of money supply. I would go as far as to say that they're way out of their depth. If anyone wants to challenge me on that claim, I think that the case of Alan Greenspan (the godfather) says it all. He even admits his own failings and the utter absurdity of what's been happening since early 2000s and earlier.

If the central bankers were so clever, they would be able to quantitatively define private debt limits. For example, if h'hold debt to GDP of 180% is "manageable", then how about 200%? What about 220%? Is the ability of h'holds to suck in artificial money endless? These questions are not just based in macroeconomics; they're also based in culture, behavioral economics, sociology, anthropology, etc.

They solved that, the trick is to ignore debt :-)

I think politicians make indirect reference to private debt being manageable, but central bankers are far more circumspect and tip toe around the issues. The primary reason for this is that central bankers are more or less technocrats who are subconsciously aware of their limitations. Politicians on the whole have more qualities similar to sociopaths.

Why does it need to grow at all?

Exactly! Wanting further mortgage growth without a corresponding increase in housing stock is just greater indebtedness, plain and simple. We are indebted enough, are we not?

Well if the population grows at say 2% per year and we are not in a crashing environment then you would always expect that lending growth would continue at that rate as a minimum

Only if you believe the current level of housing debt per capita is appropriate. I think it could do well to drop back a little.

Good question B L, ...so that the banks can make more profit ?

It will be very interesting indeed to see where mortgage growth rates are by this time next year. Less than 5% one would expect.

Wrong view: look at the rate of growth in money supply. Recession baked in. Steve Keen.