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Mortgagor Vulnerability and Deposit Affordability in New Zealand before and after the Loan-to-Value Restrictions

Karam Shaar

Mortgagors constitute a third of households in New Zealand, and the vulnerability of mortgagors to different risks impacts the financial system as a whole. This study uses Household Economic Survey (HES) microdata provided by Statistics New Zealand to assess changes in the vulnerability of new non-investor mortgagors from 2006 to 2016. The data also enable us to estimate ‘deposit affordability’ – the affordability of the equity required from households to purchase houses. Our measure of affordability computes the number of years required to save a deposit given the LVR rules that apply in the country as a whole or in a given locality.

The time period of the analysis covers the first two rounds of the Loan-to-Value Ratio (LVR) policies implemented by the Reserve Bank of New Zealand (RBNZ). However, a number of other policy changes occurred over this period, and New Zealand house prices continued to increase substantially. As a result, the data do not currently allow us to precisely identify the relative contribution of LVR policies to changes in mortgagor vulnerability and deposit affordability. Nevertheless, based on our analysis, we draw the following conclusions:

New home-occupier mortgagors are less vulnerable to a housing market bust, to declines in incomes, and to increases in interest rates now, relative to the pre-LVR period. The share of households with high debt-to-income (DTI) ratios, high debt-service-ratios (DSR), as well as high LVRs has declined considerably after the introduction of LVR restrictions. New borrowers in Auckland appear less resilient to interest rate or income shocks.

DTIs calculated from the HES microdata are lower than those calculated from the commercial bank data supplied to the Reserve Bank. Additionally, whereas the banks’ data show that DTIs have an upward trend, the HES data show that DTIs have declined after the LVR restrictions. Finally, the HES data show a higher share of mortgagors with LVRs above 80 percent. This note provides reasons for the different results obtained from each data source.

Deposit affordability has declined, especially in Auckland. Although the LVR restrictions are likely to have required some households to save longer for a deposit than otherwise, it is difficult to disentangle this impact from other factors, such as rising house prices. Commercial banks can fund some high LVR borrowing under the current regulations. In the period since the LVR policy has been in place, commercial banks have disproportionately allocated high LVR lending to first-home buyers. There is also evidence that first-home buyers have substituted to lower value housing and relied on parental guarantees.