What’s going on with the housing market and banks?

So, you might have heard a bunch of stuff in the media since late 2021 about banks declining lending and the housing market plummeting. So what’s going on? Here’s my take:

Well, the Government made changes to regulation increasing the obligation on lenders around responsible lending effective December 2021. Without getting too technical for the purposes of this article, the primary focus then went from Loan to Value Ratio (LVR – amount of the loan to value of the property being secured, eg a house, with a side-calculation on income/spending ratios), to more of a focus on Loan to Income Ratio (LIR – amount of loan to amount of money earnt and spent). The objective of the changes were largely to ensure people could afford the loans they were taking out, and not hocked up with unaffordable debt in light of inevitable rise of mortgage interest rates that we’re starting to seeing now - and even more so to keep high-interest third tier or mezzanine lenders in check.

But what’s *actually* happened is that banks in particular are trawling through bank account history scrutinising discretionary spending and spending habits in detail. One client looking at selling her existing house and buying another recently described this as leaving her feeling completely violated and embarrassed. Yep, those media articles you might have read where people are reporting bank scrutiny of cash withdrawals, what you bought at Kmart, and takeaway spending, are very real.

And imagine what happens next! Yep, we’re seeing banks declining mortgage applications left, right and centre across all home buyer demographic groups. On top of that finance approvals are taking 3-4 weeks in our experience. Want pre-approval to buy another house on the basis of a sale? Or want to buy at action? Nup. Both are virtually impossible.

And imagine what THEN happens! Yep, housing sales are taking significantly longer sitting in the conditional agreement stage, and regularly tipping over several weeks later because the finance condition isn’t satisfied. And if you're thinking of selling at auction, I've talked to agents across Rotorua and Tauranga about the market and lending difficulties recently, and it’s my view the days of selling at auction could be over for a bit: there’s a housing stock shortage and it’s getting less common for buyers to be cashed up from a previous house sale, and the reality is the majority of buyers need a mortgage but can’t get finance pre-approval to buy at auction in the first place either. It’s a catch 22.

Unsurprisingly, bank mortgage lending is reportedly down significantly overall (in the billions), and national house sale numbers are down significantly too. Imagine.

So where to from here in early 2022? Well, one main bank has already publicly stated they believe the regulatory lending changes are being mis-interpreted. And the Government itself has also publicly said the changes weren’t intended to be interpreted as they currently are either, and there’s going to be a review. When and how long that might take, who knows. But I do believe that the situation will sort itself out in the next few months because the country needs the housing market to tick over, and banks need to lend money to make money. So watch that space!

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