Fixes to lending laws to allow first-home buyers into weak property market

But one economist says "regardless of rule tweaks, buyers are holding back"

Fixes to lending laws to allow first-home buyers into weak property market

The New Zealand government is set to release draft changes to the Credit Contracts and Consumer Finance Act (CCCFA) that remove requirements for banks and other mortgage lenders to strictly scrutinise borrowers’ spending habits on their bank statements.

Read more: Government tweaks controversial CCCFA lending laws

The exposure draft of amendments to responsible lending rules will be published by Minister of Commerce David Clark, following a consultation with the finance sector, to curb any unintended consequences of the CCCFA.

Read next: Financial Advice NZ calls for minister to review impact of CCCFA

The stricter lending rules had been blamed for causing a sudden slowdown in lending, as they pushed first-home buyers further away from their homeownership dreams – this despite new nationwide sales settlement figures showing a further weakening in the property market, Newsroom reported.

CoreLogic’s latest House Price Index showed nationwide housing prices further dropped from the February reading of 0.8% to 0.7% in March, while the cities of Hamilton (-0.9%), Upper Hutt (-2%), Wellington (-0.8%), Christchurch (-0.2%), and Dunedin (-1.3%) also posted a drop in values.

The drop was less stark in provincial centres, with Rotorua (-2.1%) and Hastings (-0.4%) showing the biggest declines.

Meanwhile, there has been a continued rise in values month-on-month in Auckland (1.4%), Tauranga (0.6%), Gisborne (3.5%), Whanganui (1.5%), and most markedly, Queenstown, which posted a massive 11.3% increase to an average $1,684,142, placing it well ahead of Auckland, where the average value was $1,520,341.                                                                                                                                  

The exposure draft is also expected to remove regular “savings” and “investments” as examples of outgoings that lenders need to inquire into and to clarify that the requirement to obtain information in “sufficient detail” only relates to information provided by borrowers directly rather than relating to information from bank transaction records.

Nick Goodall, CoreLogic NZ head of research, said the trend across the other main urban areas was slightly mixed and inconsistent month-to-month, which is a clear sign of change. Queenstown’s market appeared to be very volatile as transactions dried up, but some sales still did well.

“Much of the concern for future vulnerability is for the equity position, and ability for recent home buyers, and in particular first-home buyers, to pay higher mortgage repayments,” Goodall said. “The increases in interest rates over the past nine months are a key reason for this, with most terms now more than 1.5 percentage points higher than their low point. Anyone negotiating that in their budget could be looking at an extra $40 per fortnight for every $100,000 in debt they’re refixing.”

Goodall pointed to new analysis by the Reserve Bank of Australia showing that although first-home buyers were at greater risk than other buyers due to their lower equity position, they had lower rates of mortgage arrears over time. This cohort having better job security and a faster future earnings potential meant their ability to withstand an economic downturn was greater. This analysis, he said, “is likely to be just as applicable to the New Zealand market as Australia.”

“If unemployment stays anywhere near as low as it currently is, then the likelihood of motivated or forced sales should remain low, helping to guard against a severe downturn,” Goodall said. “We’ve already seen a significant drop in loans being advanced as a result of the tightened loan-to-value ratio limits, on top of the changes to the Credit Contracts and Consumer Finance Act. But the Credit Contracts Act will soon be relaxed and the banks have shot way below the loan-to-value limits so have a little room to open back up. We’re now hearing pre-approvals are being looked at again and banks have also started to relax their self-imposed debt-to-income caps, so perhaps we’ll look back on the first quarter of 2022 as the tightest it ever got.”

A recently released real estate agent survey by economist Tony Alexander indicated the promised easing of the lending constraints is not yet having much impact on sales.

Alexander said “there's a lower fear of missing out and a higher fear of overpaying” and that “regardless of rule tweaks, buyers are holding back,” Newsroom reported.