First-home buyers are propping up an otherwise sluggish housing market, accounting for a record-high portion of banks’ new mortgage lending in May.
First-home buyers made up 24.3 per cent of the $5.9 billion of new mortgages written during the month – the highest portion since Reserve Bank (RBNZ) records began in 2014.
The amount of money they borrowed was up 8 per cent compared to May last year, and the most since December 2021, when the property market was red-hot.
Total new mortgage lending (including to other owner-occupiers, investors and businesses) in May was 14 per cent lower than it was in May 2022, and a whopping 34 per cent lower than it was in May 2021.
In recent years, first-home buyers have become increasingly prominent in the market at the expense of investors.
In May, investors accounted for 16.9 per cent of new mortgage lending. Back in 2016, their slice of the pie was proportionately twice as large.
While the RBNZ has effectively poured cold water on the property market by hiking the Official Cash Rate (OCR) aggressively to lower inflation, investors’ retreat from the market has coincided with a raft of Government policy decisions aimed at reducing their demand to the benefit of first-home buyers.
In March 2021, the Government announced it would progressively stop investors from writing off interest as an expense when paying tax. It also extended the bright-line test from five to 10 years. This means investors have to pay income tax on gains received from buying and selling property within 10 years.
Meanwhile, after completely removing loan-to-value ratio (LVR) restrictions in response to Covid-19, the RBNZ reinstated these rules at a tight level for investors.
Until June 1, nearly all investors needed a deposit of at least 40 per cent to get a mortgage. The RBNZ has just loosened these rules a little. The vast bulk of investors now need deposits of at least 35 per cent.
Modelling done by ANZ economists suggests LVR restrictions (which are aimed at maintaining stability across the financial system rather than influencing house prices) are particularly powerful in terms of cooling investor demand.
While they believe an immigration surge could lift rents, investors are expected to remain sidelined until the future of the interest deductibility rule and bright-line test are clearer.
“For now, a re-run of the 2020/21 property investor versus first-home buyer bun fight is looking exceedingly unlikely,” ANZ economists said.
“It’s very unlikely that the RBNZ would tolerate the market ripping higher, given the starting point for CPI inflation and the perceived need for the economy and discretionary spending to slow.
“At some uncertain but undeniable threshold, upside for house prices simply morphs into upside for interest rates.”
National is campaigning on once again allowing investors to write off interest as an expense when paying tax and bringing the bright-line test back to two years, but won’t say when it would implement the changes if elected to govern.
Inland Revenue can’t say how much investors have been stung by the bright-line test, as this tax is lumped in with the other income tax they pay.
However, it told the Herald that in the year to March 2022, the Crown received an additional $69 million in tax revenue thanks to the interest limitation rule, which took effect in part halfway through that tax year.
Once fully implemented in 2025/26, it is expected to cost investors $650m a year.
High interest rates are of course the major factor cooling the property market.
Total mortgage lending in May was less than what it had been in prior Mays since at least 2015. The exception was May 2020, when Covid-19 lockdowns were in place.
Nonetheless, ANZ economists see house prices rising by 3 per cent in the second half of the year.
The RBNZ in May suggested it was done hiking the OCR, and would start cutting the rate mid-next year.
However, some economists – including those at ANZ – maintain the central bank will need to lift the rate again towards the end of the year to properly stamp out high inflation.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.