Housing boom: Highly leveraged investors borrow up large

Highly leveraged investors are rushing in to buy houses, contributing to an unexpected housing boom, analysis by ASB has revealed.

In April the bank forecast a 6 per cent drop in national house prices this year, in the face of a deteriorating labour market, falling net migration and rental declines.

But it is now expecting house prices to rise 12 per cent in the year to June 2021.

“The turnaround in the fortunes of the housing market since lockdown has been remarkable,” ASB senior economist Mike Jones noted in a housing insights note released today.

“We now see prices sustaining their recent momentum, with annual house price inflation tipped at 12 per cent by June of next year.”

Vittoria Shortt, ASB chief executive, told a Trans-Tasman business circle forum on Monday that one of the biggest surprises to come out of Covid had been house price rises.

“For the last quarter they have been up 11 per cent, so a combination of the very low interest rate environment, also we have got a big housing shortage is really playing through into house price increases which is one of the big surprises over in New Zealand.”

Shortt said at the moment the bank was processing home loan applications at levels not seen since 2017.

“The mix of first home owners is much higher than ever before, and that is at an ASB level.

“We are definitely seeing a big swing in home lenders and it’s a big part of the business we are writing.”

Reserve Bank mortgage lending data shows home lending was up 26 per cent in August alone compared to August last year and it seems first home buyers and investors are the main drivers.

Jones noted the share of new lending attributable to first-home buyers hit a new high of 20 per cent in August while lending to investors had also continued to creep up and was now at 21 per cent.

“Lending to existing owner-occupiers still accounts for by far the largest share of mortgage lending, but this share has fallen sharply from 64 per cent to 58 per cent over the past 18 months.”

And it seems highly leveraged investors are behind much of the investor activity.

In April the Reserve Bank dropped loan to value ratio restrictions which controlled how much banks could lend to both investors and owner-occupiers with low equity or small deposits.

Jones said that change had given rise to a rush of new lending to more highly leveraged borrowers with growth in new lending to the high-LVR investor segment for the three months to August up 134 per cent.

For investors high LVR means they are borrowing more than 70 per cent of the value of the property while for owner-occupiers it means borrowing over 80 per cent of the value of the property.

The activity has already caught the eye of the Reserve Bank governor Adrian Orr.

Orr said during an online INFINZ conference on Wednesday that it would become worried about financial stability when house prices rises were being driven by very highly leveraged loans and investors rather than households.

“We are seeing early signs of both of those.”

Orr said the stocks of highly leveraged loans had come down because of the loan to value ratios it introduced in 2014.

“We took it off because of course the banks are now responsible and lending sensibly but we are starting to see the new lending go back into the 70 to 80 per cent ratio and the investor side.”

Orr said the LVR tool was still available and it could put it back on if needed and it was looking at if it was needed right now.

“At the moment relative to the extremes of where we were on the extreme lending, it is still looking okay. But it is very evident that won’t stay the same under the current conditions.”

His message to the banks was to “box smart or have it done to you” but said the industry seems to always want it have done to them.

The RBNZ has in the past made LVR decisions around the release of its financial stability reports which come out twice a year in November and May.

The next report is due on November 25.

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