How Is The Mortgage Lending Scenario Shifting In New Zealand?

Tuesday, 29 March 2022, 6:58 pm
Press Release: Kalkine

Highlights

• The NZ housing sector has observed high volatility due to rising interest rates.
• The amount of mortgage lending has decreased over the past few months, signalling a slowdown in housing demand.
• Any further interest rate hikes could lower housing demand and prompt a slowdown in housing prices.

Largely feared to be sitting in a pricing bubble, the New Zealand (NZ) housing market has been presenting major challenges to the country's economic growth. The property market has seen high volatility in recent months since interest rates have risen. The increased exposure of the domestic economy to the housing sector has made the economy highly vulnerable to changing policy decisions.

Rising property prices are just part of the problem, fuelling concerns surrounding a housing market collapse. As global headwinds create pressure on the domestic economy and interest rate increases make lending tougher, an economic slowdown seems unavoidable, threatening consumer demand.

Notably, any further interest rate hikes appear critical for mortgage borrowers with a high debt-to-income ratio. This category of borrowers is highly vulnerable to interest rate changes. Meanwhile, managing higher lending costs at a time characterised by global supply shortages can be challenging.

The onset of an inevitable fall in mortgage lending?

The atrociously high mortgage loans taken during the previous years have led to widespread concern in the economy. A clear depiction of the onset of a slowdown in the housing demand is the mortgage lending data released by the Reserve Bank. In February alone, AU$5.7 billion worth of new mortgage commitments were made, which was 22.3% higher than January 2022. The February hike was partly due to the seasonal rise in lending seen after the end of the holiday season.

While lending increased, it was significantly lower than the longer-term trend. Some market pundits believe that the new Credit Contracts and Consumer Finance rules are to be blamed for the slowdown in mortgage lending. The changes to lending laws kicked in at the beginning of December, prompting a fall in home loan applications. In fact, many other factors emerged over time with a more jarring effect.

For instance, first home buyers are facing increasingly tougher restrictions while obtaining mortgage lending, with Loan-to-Value Ratio (LVR) rules being squeezed. Moreover, tighter servicing criteria, reduced risk capacity and the imposition of debt-to-income ratios have led to a more unsettling impact on lenders. Consequently, lending has declined below average trends, with the impact visible in property sales numbers. Experts expect the slowdown to continue for the rest of the year.

Will rising interest rates drag lending further?

The current slowdown in mortgage lending seems to be the beginning of deceleration in property market growth, especially after interest rate hikes. The increase in interest rates is expected to become more frequent in the coming months as the Reserve Bank tackles inflationary pressures caused by supply-side constraints.

Speculations are rife that mortgage rates could rise above 5% for the first time in seven years, sparking concerns about the deteriorated cost of living. As the demand for housing decreases under an increased interest rate environment, housing prices might also go downhill.

Consequently, consumers might feel less wealthy with their properties becoming less valuable, leading to lower demand for goods and services in the economy. Also, if incomes fail to match pace with rising prices, demand for housing might invariably decrease.

Given these factors, experts are anticipating a slowdown in the housing market. Analysts at the ANZ and BNZ banks expect housing prices to decline by 10% this year. According to ANZ Bank, some part of the slowdown is already visible in the property market, where house prices have fallen by 2.6% since November 2021. Additionally, home buyer sentiment and auction clearance rates have been hit adversely, laying the perfect foundation stone for the housing bubble burst.

It is worth noting that a bubble-like scenario is feared whenever the actual value of a variable is infinitely greater than its expected value. At present, the inflated valuation of housing prices is a big red flag showcasing the onset of a pricing bubble.

Additional interest rate hikes in the country are widely expected to deflate the housing bubble. Consequently, the central bank would be tasked with managing inflationary pressures alongside a slowdown in housing demand. Therefore, it seems imperative for the central bank to tread carefully over the coming months.

GOOD READ: Why is stagflation back on investors' minds?

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