First home buyers took out a record number of mortgages last month, but resurgent investor interest may be about to start sidelining them again, says David Hargreaves

First home buyers took out over 3000 mortgages last month collectively worth nearly $1.4 billion. In terms of both numbers of mortgages and the amount advanced these are records since the Reserve Bank began publishing this information in 2014.

But behind the headlines of a record amount of mortgage money (over $7.3 billion) advanced generally in September to all borrowers, lies a picture of shifting sands, which suggests that as things stand investors are starting to stand up strongly in the market again. And at what point will this start to impact the first home buyers?

At the heart of the recent housing story in this country has been the loan to value ratio restrictions first implemented by the Reserve Bank in 2013.

The RBNZ has subsequently conceded that the first iteration of the LVRs "disproportionately restricted" purchases of houses by first home buyers.

Six years ago, in September 2014, FHBs signed up for less than half the number of mortgages (under 1500) that the same grouping signed up for in September 2020.

The problem for the FHBs with the first iteration of the LVRs was that because it was a blanket 'speed limit' applied to the banks, meaning banks could not advance more than 10% of new mortgage money on loans in excess of 80% of the property, the FHBs were immediately at a disadvantage. As buyers they are the grouping least likely to be able to muster a 20% deposit as required for a 'normal' non-high-LVR loan. And they were swamped and outbid by the investors, increasingly.

In September 2014 the FHBs claimed, with $430 million, a little over 10% of the nearly $4.3 billion total monies advanced. 

In the same month investors took over $1.2 billion. And their share would only get higher in the months ahead.

Putting the clamps on

The circuit breaker came in July 2016 when the RBNZ announced it was clapping a 40% deposit rule on investors. It was only then that the FHBs started clawing back into the frame as investors, who by that point were claiming up to 35% of the monthly share of mortgages, retreated.

And so, fast-forward to this year and March, the last buoyant month ahead of the Covid crisis and just ahead of the lockdown, which started towards the end of the month.

A total of $6.181 billion was advanced in mortgages. FHBs took $1.137 billion (18.4%) of this while investors had $1.319 billion (21.3%).

Then we locked down, and during that time the RBNZ decided to lift all LVR restrictions for a least 12 months from May 1. This included the limits on investors, who were by the time (after earlier relaxation of the rules) requiring 30% deposits. But after May 1 that all went.

June was the first month in which we had a reasonable amount of Alert Level 1 time and therefore serves as the month in which the housing market really got re-started. 

Out of the traps...

And the FHBs were raring to go. They borrowed over a billion dollars - actually slightly more than the investors (for only the second time they've done that in a month). And while the amount of money borrowed by the FHBs was not a record, the share of the overall amount was, at 20.3%.

Next month, July, the FHBs went better, borrowing 20.4% of the total amount of monies advanced, while the over $1.3 billion they borrowed was a new high water mark too.

But something was happening in investor land. Ah, there's no LVRs any more! We can borrow up, people! No 30% deposits! And have you seen the rubbish the banks are offering for term deposits. Let's buy a second house!

And in they climbed, borrowing over $1.4 billion - but crucially, with nearly $450 million of that for mortgages with a less than 30% deposit. That compared with just over $200 million of high LVR loans the previous month.

In August the FHBs borrowed exactly the same amount they borrowed in July ($1.344 billion), but it was shared between 76 fewer mortgages and the overall share of monies advanced fell to 19.8%. 

Then in September the FHBs hit the new record amount borrowed of nearly $1.4 billion, but the overall share of the market was 19.1%. So, declining by the month.

Investors on the up

Meanwhile the share of mortgages taken by investors has risen from 19.4% in June to 22.7% in September.

So, they were behind the FHBs in June and now they are well ahead again.

The $1.661 billion borrowed by investors in September was this grouping's highest total since August 2016 - which is pretty significant since August 2016 was the first month that the banks applied 'in spirit' the investor deposit rules that were announced by the RBNZ towards the end of July that year.

The amount borrowed by investors in September was more than $600 million more than this grouping borrowed in June.

The amount of money borrowed by investors in September with deposits less than 30% was over $600 million, which was more than $400 million more than the high LVR total in June.

So, in other words, high LVR lending made up two thirds of the growth in investor mortgages between the June and September months.

FHBs hit the ceiling

What about FHBs and high LVR lending then? Well, that was already at high levels, with signs it ain't going any higher. In March 38% of the money borrowed by FHBs was on loans with a less than 20% deposit. In the curtailed month of May that actually blew out to 44.3%, before dropping again to 42.8% in June, 42.9% in July, 41.2% in August and 41.7% in September. 

Looks to me like either the borrowers or the banks have reached some kind of a 'ceiling' at a shade above 40% in terms of the high LVR loans for FHBs. 

All of which suggests that the obvious area of growth in coming months, assuming there's no reimposition of LVRs, will be in high LVR lending to investors. 

And does this mean that the investors will be outbidding the FHBs increasingly?

Super size my mortgage

Average mortgage sizes for investors have increased. In June the average mortgage size was $328,000. In September it was $376,000. If we take high LVR loans for investors (deposits smaller than 30%) the average size of these high LVR mortgages has actually blown out from $352,000 in June to $450,000 in September.

Mortgage sizes for FHBs have been more static. The average size was $451,000 in June and $462,000 in September. In terms of high LVR mortgages for FHBs, the average was $501,000 in June and $511,000 in September. 

Has the rubber band stretched as far as it can for the FHBs?

As I say, these figures would all tend to paint a picture of the investors starting to strongly re-assert themselves in the housing market. They have been dominant before and we have seen the FHBs sidelined before. Is that about to happen again? 

Well shall find out.