Mortgage lending in soft patch

By Andrea Milner

Although consumer-lending growth has edged up a fraction between September and October, it remains muted.

ASB chief economist Nick Tuffley says, “What we’re seeing with lending figures is the start of a slowing growth trend that has been evident elsewhere in the housing data.

“It has started later than the softening we’ve seen coming through in the house sales and price figures.

“In terms of property market direction signals, lending isn’t one of the early barometers, unlike sales volumes and prices, which show earlier signs of a shift.”

On a monthly basis, seasonally-adjusted household lending continues to run at 0.8%, down from the 1.1 to 1.2% trend in late 2006 and the first half of 2007. The raw figures do show a degree of spring bounce that was missing from the September figures.

In September the lending figures were looking “quite soft,” says Tuffley, but they’ve seen “a bit of a spring pick up” in October. However this pick up is coming through later than expected, tying in with house sales, which had a weak September but a slight rebound coming through in October.

“I’d expect to see the lending figures will show some gradual slowing going forward given the price momentum in housing seems to be abating now the median house price has flattened off.

“With lending growth one of the things that seems to closely match it is house price growth – it’s one of the key drivers, which makes sense because as prices rise, people need to borrow a lot more money.”

Looking forward, says Tuffley, “we will see that price growth slowing fairly rapidly over the next three to six months given the median house price isn’t moving and this implies lending growth will moderate as well”.  

Tuffley acknowledges banks are currently seeing less demand for loans, with buyers being choosier. “They can afford to be because the amount of available listings is starting to creep up, especially in Auckland.”

The local lending environment contrasts with that in the US, he says, where he says lending growth will be constrained because credit has become harder to get. Credit in the sub prime market there has dried up. “In the US you are actually shutting out potential borrowers because the lending criteria has tightened substantially.”

The factors affecting local lending growth are just that interest rates have been rising and house prices are “stretched,” he says. “Its more of an affordability-induced slowdown. For a lot of people, mortgage repayments are starting to get a bit steep – their incomes aren’t going as far in terms of being able to buy a house and service debt.

“We’re just going through a cooling down after a period of incredibly strong growth.”