Both first home buyers and banks are taking on more risk

Property / analysis

Banks are lending more to first home buyers with less than a 20% deposit

27th May 24, 4:27pm by Greg Ninness

Banks appear willing to take on more risk when lending to first home buyers who don't have at least a 20% deposit, just as the housing market heads into its winter hibernation.

Based on the latest Reserve Bank figures, the average size of mortgages approved to first home buyers with at least a 20% deposit in April was $517,527. The average amount lent to first home buyers with less than a 20% deposit was $636,620, a difference of $119,093.

The difference of almost $120,000 between the average amount banks were prepared to lend the lower risk borrowers with at least a 20% mortgage and the amount they were prepared to lend to higher risk, low equity borrowers, was up 30% compared to March, and was the third highest it has ever been, according to figures dating back to 2014.

The only times the difference between the average amounts lent to the two groups was greater was in March and May of 2022 ($124,239 and $127,375 respectively), when the housing market had just passed the peak of the last price boom.

The latest jump in the amount being lent to low equity first home buyers comes as the total number of mortgages being approved for first home buyers starts a seasonal decline, dropping from 2447 in March to 2279 in April.

Although increasing the amount being lent to first home buyers helps to support total lending levels, it is not without risk.

The figures suggest that the first home borrowers receiving the low equity loans are likely to be highly paid, but will have a lower level of savings to use as a deposit than borrowers with a full deposit.

Low equity mortgages generally also have a higher interest rate and higher fees than a normal mortgage, which push up their costs compared to the amount borrowed.

They also help to prop up prices at the bottom of the market.

Interest.co.nz estimates the average purchase price of homes bought by first home buyers with at least a 20% deposit was $647,000 in April, compared to $707,000 for homes purchased by first home buyers with less than a 20% deposit.

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37 Comments

by Retired-Poppy | 27th May 24, 5:26pm 1716787561

FHB's, there are more reasons for vendor selling to intensify throughout this year and into next. Take your time, don't risk becoming cannon fodder. Why buy into an over-indebtedness situation yourself. Take the time to build a large deposit, it's worth it!

by Pa1nter | 27th May 24, 6:19pm 1716790741

I know peers who talked like this when I was in my 20s.

Not sure if any of them ended up buying a house.

But yes, anyone who's able to save 10s of thousands a year in this economy is well served by this advice.

by Jesse1 | 27th May 24, 7:13pm 1716794033

It did make logical sense back then, prices were really high in 2008 considering the interest rates at the time. No one thought interest rates could ever get as low as they did, and no one thought we would end up importing so many people either.

In hindsight it was the wrong call back then but that doesn't mean it will be the wrong call from here (to stay out of the market and invest elsewhere).

by Pa1nter | 27th May 24, 9:03pm 1716800596

It did make logical sense back then, prices were really high in 2008 considering the interest rates at the time. No one thought interest rates could ever get as low as they did, and no one thought we would end up importing so many people either.

It always makes some sort of logical sense, and houses always seem too expensive. People making endless predictions on here use some logic to form their prophecies. Sounds great on the surface, except like 2008's unseen low future interest rates, or migration, there's a whole host of other factors going on that have meant sharp interest rate rises haven't resulted in immediate brown trousers for vendors.

Sad fact is the Death Star trench run of trying to perfectly find some point in time where your wages and savings are going up, while house, living and lending costs head down, involves quite a lot of magic.

by Time Lord | 28th May 24, 7:38am 1716838697

I know peers who talked like this when I was in my 20s. Not sure if any of them ended up buying a house.

That has zero relevance to the economic environment we’re facing today after 15 years of criminally low rates. This demonstrates a short-sighted perspective and an expectation that historical trends will always produce the same results.

You don’t actually need all the variables you’ve listed to be in a perfect state for house prices to drop:

Living expenses and lending costs are going up faster than wages - the result is less money in the economy to support house prices. We’re seeing that with less sales getting across the line and listings pilling up.
Savings are earning more interest, so FHBs can use it to add to their deposit or to supplement their rent while house sales keep stuttering and house prices correct to higher interest rates.
Magic is not required

by Zwifter | 28th May 24, 10:51am 1716850287

Bought my first house in 2005, never looked back it doubled in value by the time it was paid off.

by Time Lord | 28th May 24, 12:01pm 1716854472

Congratulations Zwifter.

However, that also offers zero relevance to a FHB in 2024

by ex socialist | 28th May 24, 7:29am 1716838177

In reality the period 2000 to current has been the anomoly of interest rates below house price inflation. If you look at 1960 to 2000 house prices went up less than overall inflation and therefore interest rates. It is really only since 2008 government have believed that you could print money without impacts on inflation - and they are winding that view back now.

by ChrisOfNoFame | 28th May 24, 10:23am 1716848591

The problem was "house price inflation". Not the low interest rates. (Think about the phase correlation is not causation.)

Funny how people conflate the two.

Interest rates affect the whole economy. Not just house prices. (And spare me the nonsense that NZ's economy is all houses.)

READ THIS BIT: Most developed economies have prudential controls (LVRs, DTIs, reserve classes, etc.) that limit the amount of lending that can be lent on residential houses. NZ? Not so much. Like always - way, way, way behind the eight-ball.

(Looks at the RBNZ and wonders why they did bugger all and who is responsible for the mess we're in the mess we're in...)

by M0ralHazard | 28th May 24, 12:58pm 1716857930

They did bugger all? No, they did plenty by removing the LVRs in 2020, spurring on the covid borrowing binge.

by Quidgybo | 28th May 24, 8:49am 1716842997

I hope your right. but as others have said, people have been saying that for decades about NZ, I believed it around 2012 and things sky rocketed, when labor got in an promised to fix housing in 2017?, we all held our breath and the prices went up and up and up.

I bought a house at what now appears to have been peak as there is only so long you can wait, prices go up and down, but your age only goes up.

I don't regret it.

by tothepoint | 28th May 24, 10:42am 1716849756

Hi Quidbygo,

You are not alone……

Very few people who have bought homes seem to regret it. Certainly, we don’t get people coming here lamenting their past house purchases.

Part of the reason for the above is that home ownership is not just about money. Many of the benefits of house ownership are intangible - they can’t necessarily be expressed in $$$ terms - but are among the key reasons why people are so keen to own their own homes. So, even if you make a financial “loss” on your home, you may still be pleased that you bought it.

The moral of the story is that factors like security, flexibility, independence (from landlords), stability, pride of ownership, sense of achievement and social status carry a good deal of weight for the majority of home owners - no matter the price they paid for their abode.

TTP

by starrider | 28th May 24, 11:43am 1716853433

It certainly seems like the banks are working hard to enable marginal FHB mortgages prior to DTI's being introduced.

There is also a distinct whiff of rotten intentions - Banks doing their best to try and support the Ponzi at the bottom/median zone, as the larger the mortgage the larger the bank profit. The last thing the banks want is for house prices to continue to fall/stagnate for the next 5 years.

FHB's - don't fall into the trap of the smiling mortgage broker or the buddy buddy bank lending specialist. Keep renting (still 50% less than the cost of ownership - mortgage, rates, insurance, repairs) and keep saving that 50% difference for another winter.

by scooter_mcgavin | 27th May 24, 7:41pm 1716795713

Classic! It's everyones fault except for the leeching succubus generation that is the Boomer Landlord.

Time for the nest egg to go Ka-Boom. I for one am not going to catch the falling knife.

-SMG.

by M Munson | 27th May 24, 6:02pm 1716789747

I am one of, who you so eloquently describe as, the leeching succubus generation. Will be selling in the next year or two and have no problem whatsoever discounting for a purchaser who I deem worthy.

What I certainly won’t do, however, is ever sell to sanctimonious pond scum such as yourself.

Isn’t it fun trading metaphors.

Kind regards,

M Munson.

by Nzdan | 27th May 24, 7:47pm 1716796033

You don't have to like or agree with the facts, but doesn't mean you should respond with Ad Hom.

by TronMVP | 27th May 24, 9:41pm 1716802871

You don't think that Scooter's comment was Ad Hom also?

by 1harlow1 | 28th May 24, 6:40am 1716835247

That would be impossible considering it wasn't directed at anyone in particular..

by FOTC | 27th May 24, 10:02pm 1716804149

“…who I deem worthy.” pass me a bucket.

by Thats All Folks | 27th May 24, 10:53pm 1716807182

Nobody needs nor wants your approval Munson, now run along and put yourself out to pasture.

by ozzzy2 | 28th May 24, 1:55pm 1716861338

It looks like you miss out then Bugsy..

by Crayhunter | 28th May 24, 8:32am 1716841920

Sell it to a family that needs it, you mind find that a nurse moves in and has somewhere to live now while she looks after you in an old folks home,

by ozzzy2 | 28th May 24, 10:39am 1716849577

I logged in just to upvote you Munson. It's typical that Scooter the Zoomer, can't even see the irony in his own derogatory spat.

by Thats All Folks | 28th May 24, 9:50pm 1716889839

I’m sure Ryman will find you both rooms opposite each other if you ask nicely….

by squeezed_uppermiddle | 27th May 24, 6:05pm 1716789913

Someone with a 10% deposit may be lower risk than someone with 20%. For example, a well-paid professional who only started saving seriously 2 years ago would be considered lower risk than someone older who took 10+ years to pull together a 20% deposit. Is there any more info on the customers that get low equity? What % of FHB are low equity?

by CN - new | 27th May 24, 7:48pm 1716796120

"Someone with a 10% deposit may be lower risk than someone with 20%."

Yes, lower risk from a bank probability of default perspective.

Take 2 low deposit buyers of a residential dwelling with the same 95% LVR mortgage:

1) Buyer A:

i) LVR 95%

ii) debt to income < 3.0x

2) Buyer B:

i) LVR 95%

ii) debt to income > 7.0x

Two very different probabilities of default from a bank lending perspective.

Assuming both owner occupier buyers are buying in the same overvalued geographical location (e.g Auckland or Wellington in November 2021), both buyers may face the risk of going into negative equity.

by ChrisOfNoFame | 28th May 24, 10:33am 1716849222

"debt to income > 7.0x" ... Makes you wonder why the buyer isn't forced to wait a bit longer until they do have a 20% deposit, ay?

Answer: Banks would hate this as they'd make less money if everyone had a 20% deposit and the REI would too as they couldn't spruik the first sign of a rise and lure lots more in a short time frame at higher DTIs to keep the first signs of FOMO alive. (Have I mentioned I think the RBNZ is beholden to what the Australian banks want rather than what is good for NZ Inc.?)

by Speedmax | 27th May 24, 9:00pm 1716800410

Disagree. Just because somebody is a well-paid professional doesn’t make their income any more secure when things get really tough. I had the difficult task of making redundant dozens of well paid professional engineers and architects when things got really shitty in 2008-10 (outside NZ fwiw). Simply being a professional doesn’t make any difference when the work’s not there and the numbers don’t add up…

by Hastings | 27th May 24, 6:01pm 1716789684

Watch and wait, then wait a bit longer. Early 2026 perhaps?

by OldSkoolEconomics | 27th May 24, 6:40pm 1716792030

Might not be that houses are the best bet when the economy reçovers. They were for the last 100 years

Now we have climate change, wars, massive national debt pandemics, lower population growth and Ai.. we might find we have more than enough houses already

I suspect the next generation might not be as capitalist as those that messed things up

by tothepoint | 27th May 24, 7:45pm 1716795903

Don't you believe it, OSE❗️

There are heaps of younger people voting ACT and National...... Plenty of them to the right of Ghenkis Kahn‼️

A bit of a worry. ⚠️

TTP

by CN - new | 27th May 24, 11:13pm 1716808415

"Might not be that houses are the best bet when the economy reçovers"

There is always some point when residential real estate is worth buying.

by OldSkoolEconomics | 28th May 24, 10:07am 1716847631

Yes. That's true of most assets.

But there are many other investment opportunities out there that might not be as susceptible to weather events, bombing, reduced population growth, unaffordable insurance, internet meltodown, nation debt payment defaults or pandemic oriented population movements.

Whilst life might continue to be tickety boo.. most these events that just a few years ago were thought to be in the 'black swan' category.. are now all very real and each seems to have ever increasing probability of occurrence.

Just saying.. shares in military tech, AI, bitcoin and so on now far outperform residential property. I suspect flood defence tech, ai automation, 'safe' land pockets, drone defence from terror/criminal drones, bomb shelters, survivalist type businesses and so on will start to become very attractive.

by IT GUY | 27th May 24, 8:23pm 1716798207

Bank Lend

Banks foreclose if necessary

Its what they do....

by TronMVP | 27th May 24, 9:47pm 1716803252

Average purchase price for FHVs with 20% deposit was $707,000.

Therefore many FHBs were purchasing homes for over $700,000, and possibly some up to 900,000. These are crazy numbers for a first time buyer.

by Thats All Folks | 27th May 24, 10:57pm 1716807474

Good thing these numbers are being continuously being ground down under the weight of its own stupidity….

by ChrisOfNoFame | 28th May 24, 10:11am 1716847911

Ponzi schemes fail without continual entry at the bottom, right?

So banks are prepared to take on a bit more risk to ensure the Ponzi doesn't collapse?

Have I got that right?