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Mortgage lending activity in August surpassed levels from a year ago, marking the first annual increase in approximately two years. This revival can be attributed in part to the relaxation of loan-to-value ratio (LVR) rules starting from June 1st. Looking ahead, further growth in lending activity, property sales, and house prices appears probable, albeit potentially remaining somewhat subdued compared to historical standards.

According to the latest data from the Reserve Bank of New Zealand (RBNZ), gross mortgage lending activity in August amounted to $5.8 billion, reflecting a $0.4 billion increase compared to the previous year. This represents the first annual rise in lending volumes since August 2021. (These figures encompass new loans, top-ups, and bank switches but exclude existing loans undergoing repricing).

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Breaking down the data, owner-occupiers borrowed more in August compared to the same period last year, while investors remained on par with the previous year. The investor segment’s comparatively weaker performance can be attributed to cashflow challenges arising from low gross rental yields and elevated mortgage rates.

Furthermore, interest-only lending remains under control, with approximately 36% of loans to investors in August being executed on this basis (in contrast to a peak of 46% in July/August the previous year) and about 14% for owner-occupiers, compared to around 20% a year earlier.

Notably, the breakdown by loan-to-value ratio (LVR) reveals that lending to investors lacking the requisite 35% deposit (unless for new builds) remains almost non-existent. In contrast, owing to the relaxation of LVR rules from June 1st, there has been a notable uptick in lending to investors with a 35-40% deposit, a group previously excluded under the prior LVR settings.

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However, it’s important to emphasize that overall investor lending flows remain subdued, and their market activity remains relatively muted. In other words, investors borrowing with a 35-40% deposit (or 60-65% LVR) may be primarily adjusting existing loans or switching banks rather than actively acquiring additional properties.

Similarly, low-deposit lending to owner-occupiers has seen an increase recently, rising from around 6% of activity in May to 8-9% at present, which still falls below the new 15% limit but represents the highest share since late 2021. Interestingly, a substantial share (approximately 75%) of these low-deposit flows for owner-occupiers is directed towards first-time homebuyers.

Furthermore, the latest data release from the RBNZ includes a breakdown by “loan purpose,” such as property purchase, bank switches, or loan top-ups. These figures indicate that while top-ups and bank switches have remained relatively stable in recent months, there are early signs of an upturn in house purchase loans.

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In summary, it’s still early days, but the most recent mortgage lending data suggests that the housing market downturn has largely subsided, influenced partly by the easing of LVR rules on June 1st, along with relaxed CCCFA rules a month earlier. Nevertheless, caution is warranted regarding the speed and scale of any near-term rebound in property sales, lending volumes, or house prices. Mortgage rates are unlikely to decrease significantly in the near future, and the serviceability test rates continue to pose a significant hurdle for many potential borrowers.

Additionally, high mortgage rates have been a key factor in limiting the size of loans relative to incomes, as they constrain the amount of debt that can be serviced from a given wage.

On a related note, there is a reasonable likelihood that the Reserve Bank of New Zealand (RBNZ) will introduce formal caps on debt-to-income (DTI) ratios in 2024. While high DTI lending has already decreased, formal caps may not have an immediate impact. However, if imposed, they could position the RBNZ proactively to address potential financial stability risks arising from larger new mortgages when interest rates eventually decrease.

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Over the long term, DTI ratios could align house prices more closely with incomes, which grow at a slower pace than the historical rate of house price inflation observed in New Zealand over the past two to three decades. Additionally, they could limit the number of properties an individual can own until their income has increased sufficiently over a period of perhaps five to seven years to support further purchases.