By David Hargreaves

You know, I was really beginning to think (as well as hope) that we might just get away with it.

By 'it' I mean the worrying rising tide of young New Zealanders borrowing smelling-salt-requiring sums of money to get themselves into first homes.

What was needed was time.

We needed the economy to stay buoyant, employment levels to stay strong, and the housing market to hold up. Then over the course of the next two or three years the FHBs could bed themselves in and see some equity built up in their homes.

And it was looking good that we might get there.

And then you-know-what came along...

What happens in the coming months in the housing market will not just, at all, be a story about first home buyers. That's for sure. But as the buyers with generally the least equity in their homes the FHBs are at the frontline. So, I make no apologies for focusing on them here.

I've previously written of my very mixed feelings as I've, on a monthly basis, followed the surge of borrowing by the FHBs.

As we now know with the benefit of hindsight the first iteration of the Reserve Bank's loan to value ratio (LVR) 'speed limits' imposed in 2013 disproportionately impacted first home buyers.

The price to pay

And I did wonder aloud if as a country we may have a price to pay for shutting FHBs out of the market, or at least forcing them to delay by maybe some years buying houses - and seeing them miss out on the house price appreciation that occurred.

According to property information and analysis provider CoreLogic, FHBs were accounting for about 25% of house sales in this country prior to the implementation of the LVR speed limits.

It's not quite apples-with-apples, but mortgage information available from mid-2014 showed the FHBs by then accounting for less than 10% of the total mortgage money advanced. In the meantime, the investors made hay.

It wasn't until the RBNZ put the hammer down on investors - with a 40% deposit rule applied - from mid-2016 that the FHBs started to get their chance again.

The figures can be observed through the Reserve Bank's excellent residential mortgage lending by borrower type series that's been published since August 2014.

Towards the end of last year the monthly borrowing by the FHBs hit a new high in dollar terms of over $1.2 billion. In January the FHBs snared their biggest percentage of the total amount of money borrowed, at nearly 19%.

It's a stretch

Separate RBNZ figures on residential mortgage lending by debt-to-income ratio confirmed that FHBs (and other buyers for that matter) were financially stretching themselves further to get into homes.

Sector lending figures from the RBNZ show that New Zealanders in total owed nearly $280 billion in mortgages as at the end of February. That total was up 7.2% on the amount outstanding a year ago and was the fastest rate of growth since mid-2017.

As I said nearly a year ago now:

...As a country we need to hope that right now we don't get any or all of: A housing market correction, higher interest rates, a slowing economy with rising unemployment. Any or all of those things would see young home owners come under intolerable pressure.

Well, the only thing certain among that lot is that we are not going to get higher interest rates. And thank goodness for that.

Otherwise, not so good.

It's worth looking at the magnitude of what we are dealing with here. I've had a bit of a crunch of some of the February 2020 new mortgage figures.

Gearing up

The FHB grouping borrowed $938 million in that month. Of that, $371 million was borrowed on deposits of less than 20%.

So, around 40% of the money borrowed by the FHBs was on high loan to value ratio mortgages - which is very much consistent with figures in recent times.

Putting the data in terms of individual loans, the $938 million borrowed was across 2165 mortgages. So, that's an average sized mortgage of $433,256.

Breaking it down further, the $371 million within the overall total that was high LVR borrowing was spread across 752 mortgages. That's an average sized loan of $493,351. It's okay if you say it fast. Just don't dwell on it.

One obvious concern now is the possibility that house prices might sink sufficiently that some of these high LVR borrowers get into the dreaded negative equity - yes, the loan could become bigger than the value of the house.

However, with interest rates going ever lower that's actually not a problem per se. Even though people are taking on mountainous amounts of debt the ability to service the debt has actually been getting easier and easier. So, if you are not wanting or needing to move, you can hunker down and keep paying the mortgage and wait for the market to improve. And it will. Over time.

Job losses are the game changer

The real crunch though is what happens when people lose their jobs and that mountain of debt still requires its monthly fix. Unfortunately that's where we are now.

The Government response has been fantastic so far in terms of its willingness to throw money in the direction of wage subsidies. And there's the potential of six-month mortgage payment "holidays" (although of course the meter keeps running in terms of interest and principal owed).

How far can the Government go with its support? It will need to do more yet, that's for sure.

And this is where the banks - who are being cut a lot of slack by the RBNZ through such measures as the delay of the increased capital requirements and a loosening of the core funding ratio - need to come to the party and stay there.

Banks need to keep it real

We don't need a return to the bad old days of banks being all over you like a rash in good times and then "OHHHH. Give me my money back" when times turn bad. I would like to think not. And I think we've got an RBNZ at the moment that would be watching closely and reminding said banks of the slack it has been cutting them.

So, that's really just a bit of a scene-setter. Plenty to think about and keep fingers crossed over. I'm not going to make any predictions. It's pointless at the moment until such time as a rather nasty little virus has been put back in its box.

Let's just do the best we can to make this all work out.