Non-bank lending balloons

This lending was funded by the increased deposits these companies were able to attract at a lower cost of funding, RBNZ says in its latest financial stability report.

The central bank says non-banks tend to focus on market niches in which banks are less active.

It says the risks to the financial system from the increase in mortgage lending by finance companies “are likely to be limited.”

It notes about 80% of these mortgages have been provided at loan-to-valuation ratios (LVRs) of less than 70% at the time of origination and the share of finance company loans that are non-performing remains low.

Mortgage lending by non-banks remains low at about $550 million compared with the about $388 billion lent on mortgages by registered banks.  

RBNZ says mortgage refinancing between banks was elevated for a short period late last year and that coincided with mortgage rates being near their lowest point and a larger-than-normal share of mortgages rolling off fixed-rate terms.

“During this period, banks offered new customers up to 1.5% of their mortgage balance as an upfront payment to attract new mortgage business compared with typical levels of around 0.9%.”

That meant nearly three times the usual amount of mortgage debt switched banks in December while bank market shares remained largely unchanged afterwards.

“The offer benefited a small share of borrowers at the expense of banks, although it may be offset by generally higher lending margins.”

If you assumed no offset from higher margins, the cashback offer cost banks about $100 million “which is a small share of their annual profits before tax of around $10 billion.”

RBNZ says inflation of the costs of insurance of residential dwellings, contents and motor vehicles has fallen from about 20% in 2024 to about zero currently.

Impact of Iran war

RBNZ expects the impact of the war on Iran is likely to mean a slower economic recovery and could mean increasing debt-servicing stress and fewer job opportunities.

RBNZ says it seems unlikely at this stage that the war will have as large an impact on real wages as New Zealand experienced during 2021 and 2022 but “even a small decline in spending power could create financial hardship for some households, given the existing cost-of-living pressures.”

Businesses could hold back on investing and households may save more.

If AI leads to job losses in some sectors, “more borrowers may struggle to pay their mortgages.”

RBNZ says it expects lower funding costs resulting from its new capital settings will be passed on to households and businesses in “slightly lower lending rates than would have otherwise been the case,” but it expects any impact on lending rates will happen gradually.

The new capital setting may mean that mid-sized banks that are currently constrained “may begin to compete more actively to grow their lending in the near term.”

The lower risk-weights could boost competition from these smaller banks for certain types of lending such as low loan-to-valuation ratio (LVR) lending.

RBNZ says its loosening of LVR restrictions in December will support some borrowers but it noted that currently less than 15% of new lending to owner-occupiers has LVRs above 80%, well below the 25% limit.

The central bank says its new debt-to-income ratio (DTI) restrictions are set to constrain high-risk lending when interest rates are low and the housing market is strong.

“The housing market generally remains soft. National house prices are below their November 2021 peak and have been broadly flat over the past three years.”

Elevated numbers of houses available for sale are weighing on house prices, particularly in Auckland and Wellington, but house prices “remain around the top of our estimated sustainable range.”

Rising mortgage interest rates could reduce house prices further with growth in mortgage lending subdued.