What has happened to bank lending?

Samuel Pearce gave up everything from Netflix to the gym to get a home loan and avoid becoming one of the 7000 additional rejections under the Credit Contracts and Consumer Finance Act. Geraden Cann reports.

To qualify for a home loan under the Government’s new lending rules, Samuel Pearce had to cancel every subscription he had, ditch his gym membership, and cut back on visits to see his family.

As the 21-year-old aircraft engineer apprentice prepared three months of bank statements and payslips to present to banks to satisfy new Credit Contracts and Consumer Finance Act (CCCFA) requirements, his Netflix and Disney Plus had to go, and meals and drinks out became a thing of the past.

Pearce says that even with a 20 per cent deposit, preparing for the CCCFA requirements was daunting, and every element of his finances was under scrutiny.

He enlisted the help of his mortgage broker, and after looking over his statements she pointed out that his transport spending was a little high.

Pearce, who lives in Timaru, cut back on his trips to see family and friends in Christchurch, travelling up only for work, but in a sign of how stringent banks are being, his petrol costs were still brought up as a concern.

‘‘I just kind of became a bit of a hermit at home. I cut a hell of a lot of things out,’’ he says.

‘‘It is pretty hard being 21 and saying to your mates: ‘Hey look, do you mind going for a walk instead?’ But it will pay off later on, getting on [the property ladder] early.’’

In the end his efforts paid off – but he’s one of the luckier ones.

Credit reporting agency Centrix data shows the number of home loans being issued a month dropped by nearly a quarter (23 per cent) after the CCCFA came into effect, falling from around 30,000 a month to 23,000, on average.

In the past, banks required home-loan borrowers to have their deposit and evaluated their ability to afford a mortgage based on their income, with a certain amount of trust that if budgets became tight the customer would tighten the purse strings.

Under the CCCFA, lenders are required to look at customers’ spending during the three months before granting a loan, and any other debts they are carrying.

The drop in loans measured by Centrix is worth almost $2 billion a month – money that has now gone from the housing market.

Despite this fall in the number of able buyers and money in the market, mortgage broker John Bolton says he doesn’t expect it to trigger any fall in house prices, although it might slow things down and make buying riskier.

‘‘Longer term it does take credit out of the market, it does make things harder, it does mean more people are going to get caught in not-great situations and will be forced to sell their properties perhaps faster or cheaper than they have in the past,’’ Bolton says.

‘‘To say it will drop house prices would be a stretch too far, but there’s a lot going on at the moment that has the potential to drop house prices – increasing interest rates, removal of interest deductibility for property investors.

‘‘You overlay those things plus Covid, plus CCCFA changes and I think it’s just another thing that impacts on the housing market.’’

Bolton founded mortgage brokerage Squirrel and was previously general manager of products at ANZ. He started a petition calling for a reworking of the CCCFA, because he says it will financially harm many people.

Bolton estimates non-bank mortgage lenders currently make up about around 3 per cent of the home loan market, but overseas evidence suggests under the CCCFA this could rise to 10 per cent.

He says this will happen because under the CCCFA senior bank managers and directors can be personally fined $200,000 if their bank does not comply with the rules. Because banks are so big, there can be up to five steps between the banker on the ground granting the loans, and the executive who is personally liable if the loan does not comply.

The executives of non-bank lenders are generally closer to the action, and will therefore feel more secure in signing loans off.

For consumers, this drive towards non-bank loans will mean higher interest costs.

‘‘Homeowners might be paying 3.6 per cent or 3.7 per cent with the bank, they could be paying anywhere from 4.5 per cent to 7 per cent with a non-bank. So there’s going to be a lot higher interest costs there,’’ Bolton says.

‘‘I think you’re going to see more establishment fees and stuff coming back into the equation, just because of the amount of paperwork and time it’s going to take to process a mortgage now.

Pearce is part of a group that is expected to be hit particularly hard by the CCCFA – first-home buyers. ‘‘It’s going to be harder for them to evidence they can afford the mortgage, and there’s going to be a lot more paperwork,’’ Bolton says.

‘‘They’re going to have to demonstrate they can live like a church mouse upfront.’’

Older borrowers are another affected group, Bolton says, because they have fewer years of working ahead, meaning they are only eligible for shorter mortgage terms, which come with larger repayments.

Financial Advice New Zealand chief executive Katrina Shanks wrote to Commerce Minister David Clark outlining concerns of the effect on firsthome buyers, and says the reasons for rejection were illogical.

‘‘Some of the stories almost defy logic, like being refused a loan, or having the amount cut drastically because you’re spending too much on coffees and takeaways,’’ she says.

Clark announced on Friday the Council of Financial Regulators (COFR), which includes the Reserve Bank, The Treasury, the Financial Markets Authority, the Ministry of Business, Innovation and Employment, and the Commerce Commission, will bring forward an investigation into whether lenders were implementing the CCCFA as intended.

At the time of the announcement he acknowledged lenders were being more conservative, but said it was unclear whether this was due to other factors, such as interest rate increases and changes to loan to value ratio requirements (LVRs).

‘‘An investigation by COFR will determine the extent to which lender behaviour, in respect of the CCCFA, is a significant factor in changes to banks’ lending practices,’’ he told the Sunday Star-Times.

Economist Tony Alexander does a

monthly survey of mortgage advisers, and says the figures show a credit crunch is already in full swing.

In July, there was only a slight tendency for mortgage advisers to respond saying banks were becoming less willing to lend.

By December, more than nine in 10 mortgage advisers reported lenders were less willing to hand out loans.

Alexander says the CCCFA is being felt strongly, but as banks become more familiar with the new rules, he expects they will become less conservative.

He also expects rejections to decrease as people adapt their spending to the new rules.

‘‘After three months they will go back to the bank and say: ‘See, I told you I could stop drinking for three months.’ Because people have to prove this now,’’ he says.

The CCCFA, however, will continue to dampen lending, Alexander says.

‘‘This is a structural change of credit availability in New Zealand, and it will have a sustained impact on the housing market,’’ he says.

Auckland University economist Robert MacCulloch says most economists are against heavy intervention by the government when it comes to lending between willing and informed borrowers and lenders.

‘‘There’s a view those two people know best about what’s best for them, and you don’t want a heavy hand of government,’’ he says.

‘‘You can stop someone taking out a loan and really hurt them.’’

Economists look for market failures when forming judgments about any interventions needed, MacCulloch says, and when it comes to mortgages, failures do not seem to be present.

ANZ data from September shows a home loan arrears rate of 0.5 per cent – meaning one in 200 borrowers missed

payments. MacCulloch also points out that risks from mortgages are already being reduced by LVRs and will be mitigated further as debt to income requirements come in.

MacCulloch says there is a valid concern about predatory lending and money going to those who cannot repay the debt.

‘‘Predatory lending is more where you can get folks going around low-income communities and selling stuff and saying to them, someone who can’t really afford to buy it: ‘You don’t have to pay any money, just sign here’.’’

Pearce may have been lucky enough to secure pre-approval, but he still isn’t feeling positive about this year, despite some experts predicting small falls in prices.

His mindset has always been to get a home before the border reopens.

‘‘Working in aviation, I’ve been talking with a lot of people overseas and in New Zealand who either want to come back to New Zealand and buy, or are wanting to invest in New Zealand still, because they can’t see themselves moving overseas,’’ he says.

If needed, Pearce says he is ready to abandon the ability to use his KiwiSaver and the HomeStart grant and buy an investment property somewhere cheaper.

‘‘It’s not something I want to do, but if it’s the only way to get on the ladder that might be what I’ve got to do.’’

Pearce says there is a mentality in New Zealand to support local hospitality and tourism businesses, and he supports that, but to get onto the property ladder these are luxuries he can’t afford.

He liked to help others and support businesses going through tough times.

‘‘But I’ve just realised if I am going to get myself ahead, even though I’m very young, as terrible as it sounds, I have to sort of turn a blind eye.’’