Big decline in low equity loans to first home buyers who are consolidating their position at the bottom of the market

At first glance the latest Reserve Bank lending figures suggest recent increases in mortgage interest rates and tighter lending conditions have been disastrous for first home buyers.

In July mortgages were approved for 1837 first home buyers, down a whopping 37% from the 2925 mortgages approved for first home buyers in July last year.

The June figures were just as bad with 1885 mortgages approved for first home buyers, down 38% compared to the 3018 approved in June 2021.

Which suggests first home buyers have been crushed by current lending conditions.

But if you stand back and take a longer term view of the figures, things may not be as bad as they seem.

The first graph below shows the number of mortgages approved to first home buyers each month from July 2015 to July 2022, and compares that with the total number of residential sales recorded by the Real Estate Institute of NZ each month.

One of the most surprising things about the graph is how stable the first home buyer mortgage figures are.

They bounced along around 2000 a month right up until the housing market was hit with a massive tsunami of stimulus from the Reserve Bank in early 2020, which in turn unleashed a flood of irrational exuberance among house buyers, including first home buyers.

Whether the irrational exuberance was limited to house buyers, or the Reserve Bank's actions were the result of some irrational exuberance of its own, is the subject of some conjecture.

Perhaps there was a bit of both.

However there is no doubt about the effect such measures had.

Between mid-2020 and late 2021, there was a significant increase in buying activity by both first home buyers and in the overall market.

Now that the Reserve Bank is unwinding the stimulus, that brief burst of activity has settled back down.

What the figures suggest is that mortgage lending to first home buyers, and by implication the number of them that are purchasing a home of their own, is now returning to its longer term norm.

Other changes are also afoot.

The rate at which lending to first home buyers has declined is slightly slower than the rate at which overall housing sales has declined, suggesting first home buyers' share of housing sales sales each month is slowly improving.

In July 2021 the number of new mortgages approved to first home buyers was equal to 36.4% of all residential sales recorded by the REINZ.

In July 2021 that had increased to 37.4% and in July this year it was 39.3%.

That suggests first home buyers are slowly but steadily taking a bigger share of the housing market.

The nature of their borrowing is also changing.

The most dramatic decline in mortgage lending to first home buyers has been for riskier, low deposit loans, where the mortgage was for more than 80% of the property's value.

In July last year these low equity loans accounted for 35.1% of mortgages approved to first home buyers. In July this year that number had dropped back to 25.3%. That is affecting how much first home buyers are paying for their homes.

Interest.co.nz estimates the average amount first home buyers throughout the country pay for their homes each month.

Comparing these figures to the REINZ's median and lower quartile prices also shows an interesting trend, which you can see in the second graph below.

It shows that in 2015 the average price paid by first home buyers was very close to the median price of homes, but it has now moved much closer to the lower quartile price.

That, combined with the increasing share of the total housing market first home buyers are achieving suggests they are consolidating their position at the bottom of the market.

Affordability will likely be one of the main drivers of that trend, but changes to the tax rules rules for investors have probably also had an effect.

So while affordability remains a major issue for aspiring first home buyers, the figures suggest there are some things that are moving in their favour, such as taking on less high risk debt and gaining a bigger share of sales at the lower-priced end of the market.

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