After you have been around for a while you start to see things move in cycles. I’m not sure I am ready to admit that that makes me old, but it probably does!!
I am not just talking about the markets as we all know these move in cycles that no one can really predict. I am talking about business, fashion and well everything. I remember when I got rid of a denim sheepskin jacket thinking that it will never come back in, it did!!
Anyway, I digress I’m no fashionista and I am sure you’re not reading this for fashion advice. Recently we have seen some tightening from banks in what and who they will lend to. Much speculation broke out that they were tightening up because they can foresee the next property market crash about to happen. We may see a correction but when, who knows.
The banks have tightened up their policy for a few reasons. Firstly, lending to foreign buyers has seen them get burnt. Secondly, after the last GFC one of the key learnings for New Zealand banks was to reduce their reliance on offshore borrowing. The reserve bank has quite rightly asked the domestic banks to fund more of their lending locally. The downside to this is that Kiwis aren’t good savers. The people with money to invest, mainly those that are 55 plus have been used to getting higher interest rates to fund their retirement. With interest rates as low as they are, banks are struggling to attract funding domestically.
So how does that affect bank’s lending. Well before the trendy terms that came out like peer to peer lending, banks were essentially the middle man just as peer to peer lenders are. They take money off the wealthy and lend it to the not so wealthy and charge a fee in the form of an interest rate margin. With less of the wealthy putting their funds into banks they have less money to lend. So how do banks react? They credit ration. That is, they lend to the least risky prospects they can to improve the quality of their loan book. What is a typically high-risk loan? A property developer. What does Auckland need more of? Property.
So, with an ever-growing demand for property and a lack of supply that is now going to grow, the demand/supply issue for Auckland looks set to continue for the foreseeable future. Does that sound like a bubble waiting to burst?
I think what we are going to see with a low interest rate environment and credit rationing from the banks is a burgeoning non-bank market place for loans. If we go back 30 years it wasn’t uncommon for a home owner to have a home loan from a non-bank player. If they did have a home loan from a bank they may have also had a second mortgage to a non-bank lender. Banks were very conservative. It has only been since deregulation and the huge demand for credit that we have seen banks gradually take more and more risk especially with residential mortgages. Pre GFC (Global Financial Crisis) we saw banks enter into the markets that were traditionally owned by finance companies and non-bank lenders. They took on low doc loans (lending to self-employed with little or no evidence of income), applicants with bad credit reports (often under the guise of another brand). What did the non-bank lenders and finance companies do? They had to take on more risk themselves to survive. We know what happened next.
So, don’t be surprised when you next visit your bank that they are not falling over themselves to lend money to you, let alone give you a smashing interest rate. We have seen some great clients turned down. Clients that I would consider blue chip. Now, more than ever, it is going to be more important to see a mortgage adviser who can firstly get your loan approved, then advise you on an effective structure and then get a great deal for you. There are still banks that are wisely using this as an opportunity to grow their market share after some banks have effectively bought the market. There are also non-bank lenders doing their bit to grow their market share. Soon we may see new entrants into the home loan market, potentially as early as September, that are targeting first home buyers.