I hadn’t paid any attention to the Reserve Bank’s new data providing somewhat more disaggregated information on new (ie the flow not the stock) residential mortgage lending. But the Herald’s cover story this morning sent me off to have a look.
There is only 10 months of data, and the housing market has some seasonal features. And the mortgage market has already been distorted by the Reserve Bank’s first set of LVR controls – which were always likely to have impinged most heavily on first-home buyers – so we aren’t even getting a clean read on the underlying patterns of mortgage demand. But, from my perspective, the data reveal very few surprises, and the only thing that really took me by surprise was a pleasant surprise.
Here were a few of the points I noted as I worked my way down the Bank’s spreadsheet:
- By value, 69 per cent of new mortgage loans over these 10 months were to owner-occupiers. 30 per cent were to “investors” (they have a residual category called ‘business” accounting for around 1 per cent). According to the most recent census, the proportion of houses that was owner-occupied was less than two-thirds. (The two numbers aren’t directly comparable, as local councils and Housing New Zealand own significant numbers of rental properties.)
- By number, 81 per cent of new mortgage loans over these 10 months were to owner-occupiers.
- By value, 15 per cent of loans to owner-occupiers were to first home buyers. That might have been a touch lower than I expected. First home buyers will generally be borrowing a larger proportion of the value of the house, but will also be buying cheaper houses. FHBs will have been disproportionately squeezed by the Reserve Bank’s LVR controls.
- By number, 8 per cent (by number) of owner-occupier loans were to FHBs over this period, but they accounted for a third of all owner-occupier loans with LVRs above 80 per cent.
- Investors accounted for only 11 per cent (by number and value) of over 80 per cent LVR loans.
- By number, 27 per cent of new FHB borrowers were borrowing in excess of 80 per cent LVR, and about 4 per cent of other owner-occupier, and investor borrowers.
- 46 per cent of new investor loans were for LVRs of over 70 per cent (for some reason, the Bank is not collecting/reporting this data for the other categories of borrowers).
Almost all of that was quite unsurprising. And note that although the Herald devotes a lot of space to contrasting “first home buyers” with “investors”, it would seem more natural to compare all owner-occupier borrowers with all investors. Just possibly a comparison between FHBs and “first investment property purchasers” might be interesting, but we don’t have that data.
Perhaps the one thing that surprised me a little was how little high LVR lending has been going to investors over this period. Unfortunately, the period is distorted by the Bank’s controls, and it is at least possible that banks have been favouring FHBs since the LVR restrictions were put in place. And although the reporting is done at a highly aggregated level, I have heard stories of an upsurge in the proportion of loans being written by 79 per cent LVRs. If so, there is little or no effective risk reduction. The Reserve Bank keeps on asserting that 70 per cent LVR loans to investors are just as risky as 80 per cent loans to owner-occupiers, but as Ian Harrison has been arguing, as yet they have produced little or no robust evidence to support that assertion.
I suppose what I take from these data is that, once again, there is no smoking gun to justify the Governor’s apparent determination to ban banks from lending a cent to residential rental services businesses in Auckland, when they have even a moderately high LVR. Banks and borrowers are deeply irresponsible, and the Governor knows better….or so we are apparently to believe. Recall that, across the whole country, between 3 and 4 per cent of new investor mortgages in the last 12 months have had initial LVRs in excess of 80 per cent. Even if the number is double that in Auckland (and I’m not aware that anyone has that data), it hardly has the feel of reckless lending or borrowing behaviour.
The Reserve Bank has produced no evidence of any serious deterioration in lending standards. Add into the mix the still rather modest rate of growth in overall household lending, and the very encouraging results of the Reserve Bank’s own 2014 stress tests, and the case for such intrusive restrictions – with all the attendant efficiency and distributional costs – imposed by a single unelected official, is just not convincing. Even if there were more substantial evidence to support the Governor’s concern, the soundness and efficiency of the financial system – the only goal towards which the Bank can use its powers – would be at least effectively protected, at less cost to individuals and to economic efficiency, through higher capital requirements.