What is the Reserve Bank thinking about the lending market?

The Financial Stability Report is put together twice a year by the Reserve Bank and gives an insight into risks that may have been identified in the financial system

This also tends to be the vehicle that the Central Bank uses to announce relaxing or tightening of existing macroprudential tools such as the loan-to-value rules, and this year; we also get commentary on the new tool that was introduced earlier this year on July 1, which is the debt-to-income rules.

I noted that, with interest in the summary, they highlighted three areas, which they then went further into detail with “special topic” reports on each. These were:

1. As part of their stress testing programme, they asked banks to simulate a scenario that would cause them to break minimum capital requirements.
2. In the housing market, lower demand has led to declining residential construction. High interest rates mean the cost for potential new buyers remains high despite lower house prices.
3. Non-bank lenders: The RBNZ summarized developments outside traditional financing channels in this report.

The first holds little interest to me, as I believe the Bank has already gone too far with its requirements around capital and how they view the housing market and the non-bank lending channel is of interest as it gives some understanding of where interest rates and lending regulation may go.

Firstly, on the housing market, they made the following observations:

1. Activity in the housing market has been considered weak but has picked up modestly over the last year. Sales volumes have recovered as prices have stabilized as per the graph below (Figure 2.5)

From the peak in late 2021, prices have fallen an average of 14%; however, there have been significant regional variations to this, and this figure will have been dragged down by Auckland, which has dropped 20%, and Wellington, with a 23% decrease.

1. Banks tend to apply a buffer to the test rates they use when assessing customers’ ability to service a mortgage. These test rates have been acting as a constraint on a borrower’s ability to access credit, but we are now seeing these decreases on the Bank of real interest rate drops, with the test rates having dropped from their peak this year of circa 9% and now down to around 8% (figure 2.8)

Property investor activity has been weak, however recent tax policy changes should increase investor demand. First-home buyers have benefited from investors being out of the market since the start of 2022. However, as can be seen quite clearly in the graph below (figure 2.11), investor activity is showing signs of increasing, and there will be more competition between these two groups moving forward.

Now, onto the report around the non-bank lending segment, which I personally believe is set to provide a lot more solutions than we have seen previously, especially to investors who, at some stage in 2025, will find the debt-to-income rules start to bite.

Below (figure 2.15) shows what the Reserve Bank can regulate and where they currently cannot:

Whilst this graph will make it look like a large part of the overall system does not fall under their regulation, it is essential to note that the vast majority of mortgage lending does fall under the one box (deposit takers) they regulate.

I still hold concern over time that the RBNZ will try and push into these other areas when, in my opinion, they should stay in their lane.

Currently, non-bank lending makes up circa 3.4% of total lending (note that this is all lending and not just mortgage lending where the figure is significantly lower than this) as per the graph below (figure 2.16)

I will be closely keeping an eye on how this sector of the market grows in coming years.

As the report has only just been released, I have not yet had time to review it in full. I will look to discuss other relevant points in future articles.

If you would like to know how your capacity stacks up, please contact us HERE and we will be in touch to discuss this further with you.

About the author: Kris Pedersen is a leading figure in mortgage advising and property investment, consistently ranked among the country's top six mortgage advisers for the past four years. With over a decade of experience, Kris is the preferred choice for investors seeking expert guidance to expand their portfolios. He shares his insights as a respected speaker at Property Investor Association groups, and his expertise extends to New Zealand and overseas property and finance markets, with regular features in NZ Property Investor Magazine. Kris Pedersen and Kris Pedersen Mortgages Limited are registered financial service providers, ensuring transparency and reliability in all financial dealings. Their credentials on the Financial Service Providers Register can be viewed here: https://fsp-register.companiesoffice.govt.nz/