Getting the nitty gritty on housing investment

Property

New RBNZ figures show over a quarter of the amount owed on mortgages in this country is for investment property, while over 40% of that money is on interest-only terms

6th Apr 17, 4:04pm by David Hargreaves

By David Hargreaves

Over a quarter of the outstanding amount of mortgage financing in this country is for investment properties, according to a new series of statistical information from the Reserve Bank.

And over 40% of the money borrowed for investment property is on interest-only terms.

The RBNZ has produced a whole new statistical series on banking figures, replacing some stats, and augmenting existing and revamped information series such as the C5 table monitoring sector credit.

With concern being expressed nationally about the levels of household borrowing in particularly, the new information collated and provided by the RBNZ gives a much more powerful look into the country's borrowing patterns and practices.

A new table on bank loans by purpose breaks down the designated purpose of all outstanding borrowing totals and will act as a useful companion to the new residential mortgage lending by borrower type figures the RBNZ has been publishing since August 2014.

We do know from that latter series that nationwide (though largely led by Auckland) the share of new mortgage lending going to housing investors had soared - reaching around 38% prior to the RBNZ putting in place new 40% deposit rules for investors toward the end of 2016. Since then the share of new lending going to investors has declined to more like 26-27%.

But that's new lending.

The new series outlines the picture regarding outstanding loans - and this shows the predominance of housing investment is not new.

As of the end of February this year, there was $230.804 billion in total outstanding on mortgage loans. Of this, some $66.481 billion, or 28.8% of the total, was owed on mortgages styled as being for residential investment.

The new information has been backdated only as far as December, but it is worth noting that it mirrors the picture demonstrated in the new lending stats, whereby borrowing by investors has stalled since the introduction of the 40% deposit rule.

Since December the amount outstanding on mortgages for residential investment has risen by just $379 million (a 0.57% increase), while the amount for owner occupier mortgages has risen by $1.1864 billion (1.14%).

Looking a bit more closely at the investor figures with the RBNZ's new series on loans by product we can see that $28,191 billion, or 42.4%, of the money borrowed for investment houses is on interest-only terms.

Perhaps surprisingly, over 16% of the money ($26.474 billion) borrowed by owner occupiers (out of a total of $164.323 billion) is on interest-only terms.

In Australia the banks of course have been told to rein back - to no more than 30% of new lending - the amount they loan out on interest-only terms. There's been no suggestion of similar moves here, though, in fairness, the amounts of new lending on interest-only are at nothing like the levels across the ditch and have been declining in recent times.

The RBNZ's new bank loans by purpose figures also usefully breakdown commercial borrowing figures. They show, for example that about a third (keeping up with NZ's property theme) of the nearly $100 billion of outstanding business lending is for commercial property.

In the agricultural sector, over $40 billion of the $59 billion borrowed is for dairy farming. Separately, the loans by product figures show that over half of all agricultural borrowing is on interest-only terms.

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14 Comments

by NorthernLights | 6th Apr 17, 5:06pm 1491455195

Debt Debt Debt and we know what happens when we can't pay for it anymore
We have to either refinance get another income or sell

by kpnuts | 6th Apr 17, 5:18pm 1491455889

so the alternative figures are

over 70% of all mortgages are for owner occupiers and

only 11% of all mortgage lending is interest only investors - ( who will all have at least 20% equity and the majority 40% or more on their interest only loans)

So even with a 20% drop in the market - the banks will still have equity in almost all the properties they have lent against - and as long as mortgages are being paid - no real problems except maybe limiting additional lending.

so the biggest problem and risk is not equity levels but interest rates going up and mortgages becoming unaffordable.

Given that many people are still on higher fixes than currently available we probably have another couple of years before that pressure starts to make itself felt - so although the prices may fall I don't see widespread carnage anytime soon

by ThomasC | 6th Apr 17, 5:56pm 1491458164

No I don't think so.
over 70% of all mortgages are for owner occupiers and they are at the risk of losing their home.

People with 20% equity means if the price fell by 20% they lose everything, they own nothing after selling their home. The lose is 100%.

So if there is a 20% drop in the market - 20% equity owners are as good as homeless. 40% owners will experience 50% drop in their equity. No problem for banks? hardly. The banks are leveraged investors in the housing market.

So what if the drop is larger than 20%? covered bonds may default which is backed by RBNZ and this is quite unthinkable to everyone in NZ.

I see the number of listings is increasing drastically, the global interest rate is increasing, and the domestic interest rate is under the same pressure. The interest rate can go as high as double of the current level by the end of next year, we don't have a couple of years.

by Penguin | 6th Apr 17, 5:31pm 1491456695

In the UK they got rid of interest only mortgages after the GFC. Sensible stuff...but didn't really dampened property prices.

Interest only mortgages should be banned here.

by THE MAN 2 | 6th Apr 17, 9:54pm 1491472444

ThomasC. Where on earth do you get that the domestic interest rate is under pressure?
It is the Banks that are raising the floating rates slowly to scare people,into fixing.
As Kpnuts and I have said regularly, the fixed rates are lower than what many people are currently on!
Rates aren't going up much at all let alone double.

by Simon | 7th Apr 17, 9:45am 1491515159

seeing 4% fixed for a year still... anyone over 30 years old will still be seeing massive green lights as far as interest rates go - super low - remaining so for a super long time - that's why equities and property have jump -

Why do no economists consider value based on NPV using discount rate on money?

And then show how a 4% reduction in discount rate used in NPV calc can see values rise dramatically (Like we have seen).

No surprises.

Buffet said if the Fed came out and said they would leave the cash rate unchanged for the next 10 years, the Dow Jones would jump to 100k - NPV!!! (net present value, the discount rate has changed since GFC, so assets and equities have sky rocketed).

The job of Fed and other reserve banks is to consistently LIE and paint an overly positive picture so that people don't get the idea that interest rates WILL be stuck down for a very long time and blow up asset prices too far - its a conservative measure.. Since 2008 every single Fed prediction on GDP has been way too optimistic - Wheeler too - has upped rates, just to bring them back down, now talk again, watch out everyone rates are rising! Its just a conservative measure. Smart moneys been understanding fundamental principles of economics and making a killing by seeing through the BS of the 95% whose money ends up in our pockets

by SmoKey | 6th Apr 17, 9:59pm 1491472773

Only about 30% of the total lending is for productive purposes (agriculture and Business). Wonder how sustainable that level is for national GDP growth or to avoid risk of collapse, like another GFC ?

by gingerninja | 6th Apr 17, 10:08pm 1491473327

In addition to banning interest only mortgages, the UK has Capital Gains Tax, 4.5 x debt-to-income-ratios, extensive affordability tests, extensive credit scoring and is currently disincentivising property investment by removing mortgage interest as a legitimate tax deduction. They do still have property inflation but NOTHING like NZ property inflation. The UK also has the Deposit Protection Scheme. £85000 protected in each account.
When ever there is lots of easy cash sloshing about there are asset bubbles. Not just post GFC QE, throughout history this happens also. When Rome took Egypt and enjoyed cheap grain thereafter, interest rates plummeted and asset prices bubbled. The cycle repeats ad nauseum and is only tempered in times of political will and government regulation.

by Rob | 7th Apr 17, 12:51am 1491483088

At least they have done something over in the UK. NZ is a 'ambulance at the bottom of the cliff country' where something has to go wrong, for imeasures to come in, and usually those measures become over the top. Just look at things such as the leaky building crisis, the finance company collapses, to name but a few.
Like those two major problems in NZs history, some people are going to be caught out by whatever happens.

by Joe Public | 7th Apr 17, 2:17am 1491488237

Agreed the Government / Reserve Bank learnt nothing from GFC. People need to be protected from themselves and that means things like Loan to income Ratios etc so they don't overextend.

They bark on about Supply yet fail to really adequately tackle the Demand side. That leads to what we have today. They ignore what other Countries do at their own Peril because they have a few Economists/Politicians that think they know better.

by Penfold | 7th Apr 17, 12:50pm 1491526217

What do you call LVRs then and attempt to get DTI included in their tool kit, if not a learning from GFC.

This comment is just noise I'm afraid. You've lumped in Govt and NZRB together. It therefore makes little sense

by Penguin | 6th Apr 17, 10:17pm 1491473835

When house price fall it benefits 2 types: The wealthy with low leverage(as they can buy more assets at the bottom of the market) and those trying to get onto the housing ladder.

The ones it works against is the leveraged ones.

...however the leveraged ones are the majority and that's where politics comes into play!

by Joe Public | 7th Apr 17, 6:10am 1491502238

Who benefits from High House prices ? Investors ? Banks? Real Estate Firms?

People need larger mortgages to buy that they would have otherwise
Debt continues to grow at an incredible 8.8% pa
More Debt means more Interest payments in the future back to the Aussie banks
More Interest Payments means less disposable incomes
With most money being pumped into Housing less is pumped into Business

by Philly | 7th Apr 17, 12:45pm 1491525908

I'm surprise that the figure for rental properties is only a quarter of the total. I wonder if this is accurate. eg could some of the total be hidden within other structures, eg companies, farms? I guess RBNZ would have allowed for this?