As OCR looks set to rise again, home buyers are still being hit by credit reforms

Housing

Though there is another review of bank lending, home buyers should get used to borrowing less for now – which, along with the MPC decision today, could see a further cooling of the property market

Analysis: “Will house prices actually drop? I think it’s quite possible,” said our Point Home Loans mortgage adviser Janet Harris yesterday afternoon, over a cup of coffee.

The Government and Reserve Bank have pulled every possible lever to slow the rise in house prices. This afternoon, the Monetary Police Committee is expected to increase the official cash rate by 0.25 percentage points to 1 percent. Economists predict it will continue with regular rises until it gets to 2.5 percent or even 3 percent next year.

High-street lenders have already priced that in with two-year rates pushing up and over 5 percent (TSB, Westpac, Kiwibank, First CU) and five-year rates as high as 6 percent (Kiwibank).

Westpac NZ acting chief economist Michael Gordon is a member of the New Zealand Institute of Economic Research shadow board, contributing its advice on interest rates. He argues for steady OCR hikes to 2.5 percent. 

“The Reserve Bank needs to take the heat out of domestic demand to rein in inflation pressures, and a key channel for that will be via the housing market,” he says. “Mortgage rates have already risen in anticipation of OCR hikes, and this is clearly having the desired effect. But to finish the job, the Reserve Bank will need to follow through on those hikes.”

But what has emerged this summer as the big demand constraint is an unintended consequence of reforms to the Credit Contracts and Consumer Finance Act. I first reported this on December 16: that reforms intended to protect cash-strapped borrowers from rapacious High Street loan sharks were instead hitting those seeking to borrow to buy a home. 

Since the law changed on December 1, lenders must have written evidence that taking on a loan won't cause the borrower financial hardship.

Mortgage managers had begun looking very closely at potential borrowers' spending, I warned then, and would demand to see statements from all their bank accounts and credit cards.

This year, that’s come to a head. It has been, says the law firm JD Supra, “one of the stories of the summer” – and not happy reading for the Government. Reports abound of those told they had spent too much on their dog, on their weekly Friday night fish and chips, or turned away because of their Netflix subscriptions.

Yesterday, Heartland Bank told the NZX, when it reported its half-year results, that home and vehicle loans had slowed in January and February as a result of the credit law changes. The bank is taking two hours to pore over wannabe borrowers’ bank statements, chief executive Chris Flood says, and declining three times as many car loans.

“I haven't spoken to a banker that doesn't like the intent of the law, to get rid of predatory lending,” he tells the NZ Herald today. “I think it is a curse on the lower socio-economic [group] who can get caught in those debt traps.”

But he says low-income borrowers are instead being forced to turn to non-bank lenders that charge them higher interest rates. “I think it has the potential to create the exact opposite of what the act was intending to drive.”

It is a law change that may yet be reversed, or at least adjusted. Commerce minister David Clark has asked MBIE to undertake a review (again) and says he will move quickly to make tweaks to the law.

He has asked officials to analyse whether the problems reflect the proper operation of the amended law, unintended consequences of the law change, or external factors such as global economic conditions, consumer willingness to borrow, the OCR or loan-to-value ratio changes.

But for now, Harris says many of those who have complained of being refused mortgages need to adjust their expectations. Banks will still lend, she says, but at a lower level. "I have found for my clients that their borrowing capacity is $70,000 to $200,000 lower now. This has to have a run-on effect on house prices."

What that means is less to spend for first-home buyers – and for those like our family who want just a little more space for our growing kids.