Part of the early-stage recovery in the housing market comes from loosened loan-to-value ratio rules.

The latest RBNZ data shows there was $5.8 billion of gross mortgage lending in August, up by $0.4 billion from a year ago.

As part of this CoreLogic says banks’ interest-only lending remains “under control”, with about 36 per cent of loans to investors in August done on this basis, compared to a cyclical peak of 46 per cent in July/August last year, and a figure of only about 14 per cent for owner-occupiers, compared to about 20 per cent a year ago.

Perhaps the most interesting cut of these figures, says CoreLogic, is the breakdown by loan to value ratio (LVR), which shows lending to investors who don’t have the required 35 per cent deposit (unless building new) remains almost non-existent.

By contrast, given the relaxation of the LVR rules, the past few months have shown a sharp rise in the share of lending to investors with a 35-40 per cent deposit – a group precluded by the previous LVR settings.

Lending flows

CoreLogic’s chief property economist, Kelvin Davidson, says it’s also worth reiterating that overall investor lending flows remain subdued, and their purchasing activity in the market is also fairly muted. In other words, those investors borrowing with a 35-40 per cent deposit (or 60-65 per cent LVR) may be topping up existing loans or switching banks, rather than actively buying more properties.

“Similarly, low-deposit lending to owner-occupiers has also risen lately, from about 6 per cent of activity in May to 8-9 per cent now – still below the new 15 per cent speed limit, but nevertheless the highest share since late 2021. In turn, a high share (around 75 per cent) of those low-deposit flows for owner-occupiers is actually absorbed by first home buyers.”

The RBNZ also contained the latest update to the newly-published breakdown covering “loan purpose”. These figures show top-ups and bank switches have remained relatively stable in the past few months, but house purchase loans are showing early signs of an upturn.

Davidson says the latest mortgage lending figures add to other evidence that the housing market downturn has all but ended, helped in part by the loosening of the LVR rules and relaxed CCCFA rules a month before that.

“However, we’re cautious about the speed and scale of any near-term rebound in property sales, lending volumes, or house prices. Mortgage rates aren’t likely to fall significantly anytime soon – maybe not for at least another year – and the serviceability test rates remain a key hurdle for many would-be borrowers.

“High mortgage rates have recently been a key factor limiting the size of loans in relation to incomes, given they restrict how much debt can actually be serviced from a given wage.”

Formal caps

“On that note, we still think there’s a reasonable chance that formal caps on debt to income (DTI) ratios will be imposed by the RBNZ next year. To be fair, given that high DTI lending has already fallen, formal caps may not actually do much straight away. But if imposed, they’d mean the RBNZ is already ‘ahead of the curve’ for when interest rates do eventually fall again and possible financial stability risks from larger new mortgages re-emerge.”

He says in the long run, DTIs will tend to tie house prices more closely to incomes, which grow slower than the historical rate of house price inflation the country has seen over the past 20-30 years, and also limit the number of properties that anyone can own until there’s been sufficient time – maybe five to seven years – for their incomes to grow enough to allow the next purchase.