If I’ve said it once, I’ve said it a thousand times: as a property investor having all your eggs in one lender’s basket is an incredibly risky strategy.

Until recently you could kind of get away with it, because accessing bank funding was such a cheap and easy process. But now, with lending conditions and servicing criteria tighter than they’ve been in a long time, we’re starting to see more people caught out, with serious consequences.

We’re talking banks claiming full proceeds from the sale of a property to pay off other mortgage debts; and developers forced to sell properties they had intended to keep, then having to pay tax on those sales.

And with so much of the sector under pressure, finding a way around these issues is increasingly difficult, and expensive, with some investors paying hundreds of thousands in extra fees to secure alternative funding for their portfolio.

So how have things become so dire? There are a few major factors at play shaping market conditions right now.

Homogeneity

Banks completely dominate the New Zealand market.

Between them the big four, ANZ, ASB, BNZ and Westpac, account for about 87 per cent of all mortgage lending. Throw Kiwibank into the mix and you’re up to 94 per cent. Add in the smaller regional banks, and offshore banks like HSBC, and you’re at about 97 per cent.

On the surface it may seem like there’s some variety across different lenders, but each of those banks is subject to the same, highly-prescriptive Reserve Bank regulations.

The RBNZ’s handbook stipulates everything from guidelines around affordability and servicing calculations, to bank capital requirements and core funding ratios. Then there’s things like LVR restrictions and debt-to-income ratios.

Amongst all that there’s not much room for the banks to take different approaches to credit policy and risk. If you don’t fit one bank’s policy, you won’t fit any of them, and that’s scary.

Tighter Rules

This same-sameness wasn’t really a problem until a whole heap of new regulations came into effect and created a major credit crunch across the banking sector. Regulations like the new LVR restrictions and CCCFA laws introduced towards the end of last year.

Ongoing talk about the introduction of new debt-to-income ratio requirements is another influencing factor, which has much of the banking sector feeling nervous.

Servicing is getting much harder to meet. With interest rates on the rise, banks’ test servicing rates have followed suit, with most now sitting at over seven per cent (on principal and interest, not just interest-only).

That’s already tough, and the removal of tax deductibility on existing properties has added to the squeeze with banks now willing to factor less rental income into the equation.

It’s not good news for property investors, particularly anyone self-employed who’s had their income negatively impacted by Covid.

Lack Of Options

With the banks having so much of the mortgage market locked up, there’s not a lot of room for competition. So, when 97 per cent of the market is under such immense pressure, where do you go?

Although there’s a lot of talk about non-bank alternatives, the reality is the sector is far too small to cope with the overflow. And increasingly what we’re seeing in the non-bank space is that everyone’s run out of money.

There are some exceptions. Lenders who are securitising their loans through banks will still have pretty good access to funds. But those that rely on other channels (peer-to-peer, managed funds, private capital), effectively have nothing left to lend.

That means at the moment it’s extremely hard to get money for transactions outside banks, and if you do it’s incredibly expensive.

However you look at it, it’s not pretty. But stay tuned for part two in the next issue, where we’ll look at tips for property investors to help mitigate these risks as best they can.