As the rate of mortgage borrowing growth continues to slow sharply, David Hargreaves ponders on what level of growth the RBNZ would be content with

By David Hargreaves

The rate of growth in mortgage borrowing is continuing to slow sharply.

A bit of crunching of the latest Reserve Bank figures monitoring sector credit shows that in August the annual rate of growth in mortgage borrowing dropped to 6.9%, which is the lowest rate of annual growth in nearly two years.

Since the RBNZ unfurled the blunderbuss of 40% deposits for housing investors, unofficially from July, officially from October last year, the impact has been dramatic.

Add in the effects of more capital constraints from the Australian banks stemming from requirements over the ditch, the squeeze resulting from declining deposit growth rates, and the move by the big banks to 'ration' credit and the money is certainly not flowing to the would-be borrowers like it was.

The 6.9% annual growth rate in mortgages for the 12 months to the end of August compares with a 9.3% growth rate for the year ended December 2016 - which happened to be the peak of the current cycle.

Percentages in isolation can be meaningless and paint misleading pictures. So, to put this in dollar terms, in the 12 months to the end of August 2017, the amount outstanding on mortgages in New Zealand rose by $14.962 billion (to a grand total of $239.365 billion). In the 12 month period to the end of 2016 the total amount borrowed rose by some $19.614 billion, while in the period from August 2015 to August 2016 the total grew by $18.808 billion.

So, comparing apples with apples, the total amount of mortgage money outstanding rose by some $3.846 billion (20.4%) less in the last 12 months (to August) than it did in the previous 12 month period to August 2016.

All things are relative of course. Go back to August 2011 and the annual rate of growth in mortgage borrowing was just 1.3% - the dollar amount rose just $2.88 billion in that 12 month period. But those were not good times. It was the post-GFC, post-early 2000s housing boom hangover.

Things really started cranking up again in 2012. Between August 2012 and August 2013 the annual rate of growth in mortgage borrowing more than doubled from 2.5% to 5.6%. It was during this period that grumbles started emerging from the RBNZ about the growth in credit.

And indeed it was October 2013 that saw introduction of the first round of LVR measures. This did check credit growth, with the annual growth rate dipping from 5.9% as at the end of 2013 to as low as 4.5% by November 2014.

However, in the immediate aftermath of the 2014 election, and resumption of the National-led status quo, things went nuts and the credit growth annual rate had more than doubled, to 9.1% by August 2016.

Perspective

It is worth putting even the 9% growth figures in some historic perspective, however.

The RBNZ's been breaking out the mortgage figures alone only since 1999. Those very first monthly figures in the series saw annual mortgage borrowing total growth of 10%+, dipping down to a low of 6.6% in early 2001 before rising into double figures again by early 2003.

The annual growth rates then stayed in double figures right through till April 2008, with a peak of an eye-watering 17.5% growth in the 12 months to April 2004.

If we look at the longer RBNZ series, dating back to 1991 and which takes in consumer borrowing as well as mortgages, the annual growth figures there were in double figures all the way from 1991 through to mid-1998, briefly back in double figures in 1999 and then again from 2003 through to early 2008,

All of which raises the question of where the RBNZ would be comfortable with credit growth rates sitting.

Indebted

What the growth rates don't tell us of course is how indebted people are.

Well, we know separately from the RBNZ's key household financial statistics series that, including rental properties, household financial liabilities as a percentage of household disposable income are currently at a record high of 168%. At the start of this century this ratio had just pushed past 100%.

So, clearly the extent to which household finances could bear continued fast growth in mortgage borrowing would appear more limited compared with years ago. Or, certainly, the RBNZ would be less tolerant of it.

Given the current slowing trend in monthly mortgage borrowing and the uncertainty both in the run-up to and now post the election, it would appear almost certain those annual growth figures in mortgage borrowing will slip further, most probably below 6% and even possibly below 5%.

It's informative perhaps maybe that the first wave of LVR measures were implemented when the mortgage growth rates were heading toward 6% - and that they subsequently fell back to the mid 4% range.

Uncomfortable?

Might this perhaps suggest that the RBNZ gets increasingly uncomfortable with growth rates in excess of 6%?

If that is the case, what's the view then once we do - if we do - see the growth rates start to slip below 5%? If a reduction from growth rates of 9% to 5% is good, are we saying it's still good when those rates are down to 1%?

I suspect not.

Watch this space then. Because once we get to the other side of Christmas the pressure is likely to build on the RBNZ to ease up on those LVRs.

The current trend of the figures suggest that the RBNZ needs to keep a close watch. Because if you squeeze all the life out of something, it can take a while to recover.

There's certainly plenty to think about.