By David Hargreaves
I normally keep quite a close eye on the monthly mortgage figures by borrower type that the Reserve Bank has now been publishing since August 2014.
This month I kind of missed it, given that the figures came out less than 24 hours before the RBNZ announced a further tweak to its 'speed limits' on Wednesday. I was distracted.
And I missed the housing investors seemingly disappearing into a rather large hole. Well, that's a bit melodramatic, but in short the investors had their smallest monthly share of the mortgage borrowing in October since the RBNZ started publishing that data - and it was the smallest share by some way.
The investors share of the overall figures dropped to just 18.7% in October from over 21% the previous month.
I wonder about this and wonder whether when we see next month's figures it will appear to have been a glitch, or was something else going on? Were the banks anticipating perhaps that owner-occupier lenders would see their lending limits lifted by the RBNZ (as they did), but the limits for investors would be left the same?
Certainly, while I expected the RBNZ would tweak the LVR settings for owner-occupiers, I did think there was a fair chance the investor deposit requirements would be left the same. I think they should have been.
So, were the banks anticipating no change for the investor settings and holding back a bit, while loosening things up on owner-occupiers? And it is worth stating that the detailed October LVR figures actually show the highest portion of high-LVR lending advanced by the banks to owner-occupiers since the 'speed limits' were first introduced in 2013.
For the record some 13.7% of the total amount advanced in October was for mortgages with a deposit of less than 20%, while the total after exemptions (which include things like mortgages on new builds) was 10.3% - also a new high.
Anticipation ahead of the event
So maybe there was a certain anticipation on the part of banks of some loosening, even though this doesn't take effect till the start of next year. And of course it may well represent the increased competition for mortgages between the banks we have seen in the past month or two.
The other thought about the decline of the investors though is whether this is a delayed reaction to the extension of the bright line test, the capital gains tax that dare not speak its name, from two years to five years in March. Or was it in some way a reflection of the foreign buyer ban that came into effect in October?
The reaction of investors to the more relaxed deposit rules they face from January 1 - they will now need 30%, down from 35%, will be quite pivotal, I think, in how the housing market performs through and after summer.
The new iteration of the LVR rule can be described as LVR5 (sounding more like a Hollywood blockbuster by the minute). I'll just reiterate what the new rules are from January 1:
- Up to 20% (increased from 15%) of new mortgage loans to owner occupiers can have deposits of less than 20%.
- Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).
And now, courtesy of the RBNZ, here's this very helpful table of what happened with LVR versions 1-4:
I'll summarise the impact of those a bit. LVR1 was officially described as a success. A rampaging Auckland market DID slow. The great unknown about that first iteration though stems from the fact that it just so happens that it coincided with FOUR interest rate hikes from the RBNZ. Now, with or without the LVR measures those interest rate hikes WOULD have hit the housing market. So, while the RBNZ's always been quick to ascribe success to LVR1, I think you need to exercise a little caution around that. Personally I think the LVRs and the rate hikes probably worked 50-50 together.
The Auckland firestarter
Okay, then there was LVR2, the Auckland-centric one that just didn't work at all. Basically it encouraged Aucklanders with money to look outside Auckland for investments, and they did, and the housing markets in the rest of the country - which to that point had lagged Auckland in terms of price rises - then started to take off as well. I might say, I thought the Auckland LVR measures were a good idea at the time and was pretty astounded by how badly they failed. Unintended consequences and all that.
So, then we had LVR3, and it's from that point on that I will busy myself with here. That's where is all really got started and set us up for where we and the housing market are today. This is the one that took the blunderbuss to the investors - and boy, was there a reaction.
Some crunchy numbers
To demonstrate that, I'm referring to figures from October 2014 to October 2018, but also with the figures for June 2016 thrown in. While that table just above suggests the LVR3 iteration came into effect in October 2016, that's actually a bit misleading. It was announced in July by the RBNZ and the banks began to implement the 'spirit' of it straight away - so the impact was in fact immediate. Therefore you can say the June 2016 figures are the last ones before the investors began the retreat.
If, we look back to October 2014, investors represented 29% of the mortgage money advanced. In October 2015 it was 29.3%. By June 2016 it had climbed steeply to 34.8% (in dollar terms that equated to nearly $2.4 billion) but then, remarkably, by October 2016 it had shrunk to 23.6%. In October 2017 it was 22.7% and as stated earlier, in October 2018, just 18.7%. That's quite a retreat.
LVRs and distortion of buyer patterns
Good as the RBNZ mortgage data breakdowns are, it's a shame we don't have full figures available for pre-August 2014. One thing that would be interesting to get a handle on is the extent to which (and I suspect it was quite a lot) the first iteration of the LVRS in 2013 blocked off would-be first home buyers and encouraged investors. Did we end up with a distorted market because of the first wave of LVRs? Were investors effectively given a hand-up at the expense of the FHBs? You can debate it. I think, yes, they were. Those unintended consequences again.
Anyway, the situation has very much reversed since the investors were hit with the big deposit requirements.
The revival of the FHB
Going back again to October 2014, the first home buyers took just 9.5% (less than half a billion dollars) of the total mortgage money advanced that month. By October 2015 the share had increased a little to 11.5%, but by June 2016 it had shrunk to 10.8% amid the investor onslaught. However, the FHBs were not quite finished. By October 2016 they had 14.4% of the mortgage money advanced that month, then 15.7% in October 2017 and 16.6% in October 2018. And lest you think it's all about a bigger share of much less total money, the amount borrowed by FHBs in October 2018 was nearly double (at over $900 million) the amount borrowed in October 2014.
Put it all together then and what are we expecting when the new LVR5 takes effect from January?
It's worth considering what happened as of January this year the previous loosening took effect, given that the loosening from next January onward will be of similar magnitude (IE 5 percentage point tweaks for both investors and owner-occupiers).
Here, I shall compare the first 10 months of 2017 (before the previous LVR tweaks) with the first 10 months of this year, taking account of the tweaks.
For the first 10 months of 2017 new mortgages averaged $4.867 billion a month. This year it has been $5.272 billion a month.
Within this, in the first 10 months of 2017 mortgages on homes where the deposit was less than 20% averaged $306 million a month. For the first 10 months of this year the figure was $431 million a month, which is an appreciable rise, but not enormous.
$100 million a month more in mortgages?
It does suggest though that perhaps a rise in new mortgages of somewhere above $100 million a month might be expected from next January, which would certainly help the housing market, but would not appear likely to set it on fire.
The first home buyers are likely to be in gangbusters. Over recent months about a third of the mortgage money advanced to FHBs has been in high-LVR mortgages, so, you would imagine the FHBs would be in for a fair share of the extra mortgage money wiggle room the banks now have.
Really, the key thing then is what happens with the investors. Will the reduction in deposit requirements for them be enough to encourage them back into the market in bigger numbers, competing again against the FHBs and maybe driving prices higher?
What will the investors do?
The answer to that question will be crucial. It may be that the problem for a lot of wannabe investors would not be the LVRs, but the bright line test. In which case, the obvious question is how many so-called investors were never there for the rental yield but were only thinking about capital gain? Specuvestors? And over a short period of time, it seems.
With interest rates set to stay low at least for a year (barring bad external shocks) the FHBs seem sure to stay out in the market buying up this summer.
The real test will be if there is a resurgence of investor interest. If there isn't then the RBNZ will have been right to loosen the LVRs. But if there is, the game changes, and that's also the time we might see our FHBs overstretching themselves.
I'm not even going to attempt to pick which way this one will go. All I would say is that this situation is going to need both eyes very firmly focused on it. As they say, anything can happen, and it probably will.
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