BNZ chief economist says the cost of shoring up the stability of the financial sector is being borne by would-be first home buyers

The cost of improving the strength of the financial sector is being paid for by the first home buyers, BNZ chief economist Tony Alexander says.

In his latest "weekly overview" Alexander crunched the numbers on mortgage approvals, comparing the three-week period to mid-November with the last three weeks of October from this year going all the way back to 2004.

The results very much back up the anecdotal evidence that the Reserve Bank's "speed limits" on high loan-to-value lending applied from October 1 this year have had a big impact.

"The weekly home loan approvals data from the Reserve Bank showed that in the week ending November 15 the number of home loans approved was down by almost 12% from a year earlier," Alexander said. 

"Approvals have been running at levels below a year ago since about the week ending October 11. The LVR rule has clearly had an impact on lending activity. The question becomes then, how long will this last?"

Alexander's calculations, taken from RBNZ weekly mortgage figures  (as shown in table form below) revealed that on average between 2004 and 2012 in the first three weeks of November the number of home loan approvals has run 9.5% above loans in the last three weeks of October. 

"This year the change has been a fall of 2.9% and in no other year has a fall occurred. Therefore one can safely say that lending has been much weaker than one would have expected, especially as in other years when overall lending growth to September was similar (latest month available), increases still occurred.

"In fact, one can argue that for the recent three week period the number of loans has been about 10%+ less than would have been the case without the LVR rule." 

This meant therefore, that the LVR rules were "working" in terms of reducing bank exposure to loss of equity on home loans should a large shock occur, Alexander said. 

"The issue, however, is that the cost of improving financial strength is being paid by first home buyers  - and the beneficiaries are all other buyers including investors and foreigners." 

The Reserve Bank’s actions, while based upon the best of intentions, have "skewed" New Zealand’s housing market toward a reduced rate of home ownership and increased ownership by investors, Alexander said.

The latest BNZ-REINZ Residential Market Survey out last week showed that first home buyers were deserting the market in droves.

Alexander believes more young people will look to lower their sights with their first properties and instead of becoming owner-occupiers will become investors.

                          Change in 3 weeks to mid-Nov         Annual household

                           from last 3 weeks of October            debt growth, September

2013                            -2.9%                                                   5.5%

2012                            2.5%                                                    2.4%

2011                            10.5%                                                  1.0%

2010                            11.0%                                                  2.2%

2009                            0.4%                                                   2.4%

2008                            13.4%                                                  6.5%

2007                            13.2%                                                  12.9%

2006                            5.4%                                                    12.9%

2005                            9.7%                                                    15.5%

2004                            19.5%                                                  15.7%

First set of figures shows change in number of mortgage approvals between October and November, second set is the RBNZ's figures showing overall credit growth, with September being latest available month.