Will spring thaw the mortgage market freeze?
Something very rare happened in this housing-investment-obsessed country lately.
In fact, the stock of mortgages held by housing investors shrank in July. That’s right, the amount of mortgage money owed by housing investors has been reduced. To give this fact some context, in the not-too-distant past, we’ve seen the stock of mortgages held by investors on occasion grow by over $1 billion per month.
However, the Reserve Bank (RBNZ) Monthly Lending Data for July And he indicated that the pile of outstanding mortgages issued by registered banks to investors decreased by 11 million dollars per month to reach 89.631 billion dollars.
Obviously, this isn’t a huge downside. But this is unusual.
The Reserve Bank of New Zealand has only been publishing this detailed mortgage data since late 2016.
But aside from April 2020 when everything was closed, only the latest numbers for the month showed a decline for investors. And you have to think that such falls would be rare in the historical context – although it is easy to imagine declines during the post-global financial crisis of 2008 to 2011.
In the seven months (through July) of 2022 so far, the investor mortgage pile has grown by less than $1 billion — and the growth rate has been slowing.
Compare this to the first seven months of 2021 – then the mortgage pile for investors grew by about $5.2 billion.
And in the six-month period between September 2020 and March 2021, while investors celebrated the temporary elimination of LVR limits (as of May 2020), they filled their shoes with up to an additional $6.7 billion as the investor. The mortgage pile has grown at a rate of over $1 billion per month.
During that period, the investor’s real estate loan pile grew nearly 9% to more than $84 billion. No wonder, then, that the Reserve Bank of New Zealand has pushed to the limits of the LVR once again.
All of this is a far cry from what is happening now that investors have put together a cold shower set to reintroduce LVRs, tax changes to the deduction of interest and changes to credit rules.
This year will likely see the slowest growth rate in investor borrowing since the data began in 2016. It should be noted that the end of 2016 saw a sharp decline in investor activity – which continued into the 2019-20 period. This slowdown came on the heels of a somewhat desperate (it seemed to me at the time) imposition of strict 40% deposit rules for investors, as the Reserve Bank of New Zealand looked to avoid what had been housing investing activity in mid-2016.
It will be interesting to see the trend of housing investment as we move into spring.
Of course, not only housing investors are holding back.
July data shows that the registered mortgage inventory of resident owners increased by $763 million in the month (to $244.656 billion). If we rule out the April 2020 close and also November 2021, where the RBNZ reclassified a full load of mortgages from owner-occupied to investor, we have to go back to July 2017 for a slower month of growth.
In the first seven months of the year, landlords (and this category does not include first home buyers) added nearly $7.4 billion to the total mortgage inventory they held.
That compares to the $14.75 billion (over $2 billion a month!) added to the mortgage balance during the first seven months of 2021.
No wonder, of course, that the mortgage market is slowing sharply this year, when we look at what has happened to home prices since the market peaked in November 2021.
According to REINZ figures, between November 2021 and July 2022, the national average price fell by $115,000, or 12.5%, in that period to $810,000. Oakland, which is included in that national figure, did somewhat worse, dropping an average of $200,000, or just under 15.5 percent, to $1.1 million.
Given these downward prices, we can expect to see the mid-size mortgage declining. It is – now – but it has been a slow process.
Figures from the Reserve Bank of New Zealand show that the average new mortgage commitment amounted to $408,000 in May, dropped to $406,000 in June and then fell somewhat to $379,000 in July. However, that July number is only 7% below the peak average size — and still well above the $332,000 new average size mortgage commitment a year ago.
In theory, when we look at the cost of a mortgage now, it can be expected that these mortgage sizes could drop even more.
I made a quick comparison with Interest.co.nz calculatorcomparing the average mortgage size (US$332,000) last year to the average of US$379,000 in July 2022, looking at what the monthly payments would be if someone took out a 30-year fixed-rate mortgage year at the prevailing interest rates per day.
The RBNZ’s monthly average of “special” interest rates for banks shows that in July 2021 the two-year average was 2.82%, while in July of this year it was 5.4%. Details are shown below:
The upshot is that the ‘average’ mortgage holder would have borrowed $47,000 more (14% more) in July of this year than the corresponding month last year, but would have paid an extra $760—a massive 56% increase. in monthly payments.
To go back to paying the same monthly amount our ‘average’ mortgage holder paid a year ago, a person taking out a mortgage now at 5.4% would need to take out only a $244,000 mortgage—$88,000 less or $26.5. % lower, down from an average of $332,000 last year.
But of course, with the very low rates that prevailed until the middle of last year, even really large mortgages were “affordable.” So, it is up for debate how much of a mortgage size you might want to reduce to be more “affordable” now.
At the moment it doesn’t look as if fixed rate mortgages are going to rise any more than they are now. But equally, current wholesale interest rates suggest that retail prices won’t fall that fast either.
I think we’ll find out over the next few months as spring and summer come, what people are willing to commit to in mortgages, and therefore what they can pay for homes.
In the meantime, it doesn’t look like we’ll see mortgage money coming out of bank doors with anything like rotating rates in early 2021 any time soon.
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