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Prospective home buyers are battling with cautious banks to get home loans approved in the wake of the global credit crunch - and facing expensive rates for the privilege.
Things have changed "out of all recognition" in the past week and "heaps" of loan applicants who until recently
would have been approved, are now being rejected, says mortgage broker Jeff Cureton-Royle.
In particular it affects people with clean credit records but who can't easily prove all their income, he says.
One client is a commercial artist who gets worldwide commissions and wants to refinance to 65 per cent of the value of her property.
She has had no problem servicing her existing mortgage and has a clean credit record, but her application was rejected because she doesn't have a regular income.
Banks have substantially tightened their credit controls, says Chris Eves, a property studies professor at Lincoln University, Christchurch. "A customer it would have lent to 12 months ago now doesn't get approval." Eves says it's no longer standard to get a home loan approved in a few days, describing the new borrowing environment as "a return to the post-war situation".
Banks are "rationing credit," says Professor Laurence Murphy, of Auckland University's property department - requiring people to have more documentation and equity to obtain a mortgage.
Westpac's general manager of product management, David Cunningham, says there has been a "radical change" to tightening approval requirements. Inter-bank credit markets have jammed up, he says, which will restrict lending.
BNZ's general manager of strategy, Blair Vernon, says banks have reverted to preferring borrowers able to provide 20 per cent deposits. Those with less can expect to pay an insurance premium or a higher interest rate if their application is accepted.
Documentation requirements have also been upped, and those wanting to borrow 80 per cent or more will usually need to provide an up-to-date registered valuation plus evidence of servicing capacity.
The detail borrowers have to provide depends on how much they are seeking to borrow and the loan to value ratio.
Vernon says we are now seeing "market-led rationing," where money is available - but for a high price. "It's a price-led rationing, which is delivering to consumers a re-basing of what their expectations are about how cheap credit is going to be.
"It's not going to be cheap going forward."
Most economists say that Reserve Bank governor Alan Bollard is set to lower the official cash rate (OCR) by 50 basis points to 7 per cent next month in response to the likely economic impact from the global credit market situation.
But with almost half of New Zealand's housing funding sourced from global markets, OCR reductions won't pass through to the cost of credit, Vernon says.
Eves says that expensive external funds impose a "natural quota" on local housing lending.
If only a limited number of people can get a housing loan because of credit rationing, "when banks have filled their quota for the month, people just have to wait". This will further slow recovery in the housing market.
Murphy says it could also hamper home-ownership rates, which have declined over the past 10 years.
But the greatest blow will be to the investor market, he says. "It depends whether investors can maintain their mortgages and continue to roll over their credit in future."
Those with highly geared portfolios when the rent isn't covering interest payments are at "very high risk," says Eves, and they are the ones selling now and taking the biggest hits. The banks' tighter credit controls will not satisfy the market because it is "more bloodthirsty" than that.
Eves and Murphy predict that, as even small investors get burned, there will be a call on governments for higher level regulation of the housing market and mortgages to protect them in future.
The Reserve Bank has declined to comment on the likelihood of more regulation.
Vernon says it is mortgage brokers and some property-investing seminar providers who should come under regulatory scrutiny, but Murphy says that it is incumbent on banks to check information coming from mortgage brokers - through whom most of the banks have aggressively competed for market share.
The BNZ doesn't deal through brokers because of concern that not meeting borrowers directly makes it difficult to size up whether they know what they are doing.
"All the dimensions of what a mortgage actually means and your obligations," Vernon says.
Brokers may have an incentive to "be generous in their interpretation" of applicants' assets or income, Murphy says.
"There has always been risk in the way mortgages are originated [in the local market]," Vernon says. "We think this is one area where there has been a real gap, and the number of people who have found themselves in a spot of bother relating to originations they've had through intermediaries for 'rent-to-buy' schemes and investment properties reflects that."
But Mark Withers, property tax expert and author of Property Tax in New Zealand, says the decision to lend rests with the banks - it's not the fault of a seminar or broker.
Vernon considers that the "fascination with leveraging up to grow wealth through housing" requires management, and that existing tax arrangements in effect "incentivises" highly geared housing investment and create a structural imbalance against other forms of investing.
"How did a whole lot of people rock along to seminars and think they were going to make an enormous amount of money by negatively gearing investment property they'd never laid eyes on?
A large part of the sales script was around the tax effective nature of this investment. There are not many other investment products where you can run a seminar like that in this country."
Withers says there's nothing particular about property that confers preferential tax treatment to any other business and if property investors were not allowed tax deductions it would be unfairly singling out one sector for different tax treatment.
It's just property investors have been willing to accept trading losses in anticipation of longer term growth in asset values, rental growth over time and perhaps declining interest rates.
"Some of the buying was so speculative - people were accepting 5 per cent yields and borrowing money at 9 per cent. No amount of tax relief will ever turn that into a cash surplus."
But with perceptions of capital growth changing, the new wave of property investors who bought during the boom are realising that borrowing money to lose money isn't such a good idea, removing any need for a regulatory curb in the form of new tax rules, Withers says.
A treasury report last year said the only regulatory action needed was to focus on enforcing existing rules that tax property traders.
