To qualify for a home loan under the government’s new lending rules, Samuel Pierce had to cancel every subscription he had, give up his gym membership, and cut back on visits to see his family.
As the 21-year-old aircraft engineer trainee prepares three months of bank statement and payment statements to submit to banks to meet new CCCFA requirements, Netflix and Disney+ Plus had to go, meals and drinks became a thing of the past.
Even with a 20 percent deposit, Pierce says, preparing for the CCCFA requirements was a painstaking task, and every element of his finances was under scrutiny.
He sought help from his mortgage broker, and after seeing his statements, she indicated that his spending on transportation was a bit high.
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Pierce, who lives in Timaru, has cut back on his trips to see family and friends in Christchurch, traveling only for work, but in a sign of how strict the banks are, his petrol costs remain a concern.
“I’ve become kind of a hermit at home. I’ve been through a lot of hell,” he says.
“It’s so hard to be 21 and say to your friends, ‘Look, would you mind going for a walk instead?'” But it will pay off later [the property ladder] Early.”
In the end, his efforts paid off – but he’s one of the lucky ones.
Data from credit reporting agency Centrix shows that the number of mortgages issued per month fell by about a quarter (23 percent) after the CCCFA took effect, dropping from about 30,000 per month to an average of 23,000.
In the past, banks would require housing loan borrowers to deposit their deposits and assess their mortgage affordability based on their income, with a certain amount of confidence that if budgets became tight, the customer would tighten portfolio constraints.
Under the CCCFA, lenders are required to consider customers’ spending during the three months before the loan is granted, and any other debts they incur.
Removing billions of mortgages from the market
The value of the decline in loans measured by Centrix is about $2 billion per month — all the money that was previously competing in the housing market is no longer the case.
Despite this drop in the number of able-bodied buyers and money in the market, mortgage broker John Bolton says he doesn’t expect it to lead to any drop in home prices, although it could slow things down and make buying more risky.
“In the long run, it takes credit from the market, it makes things more difficult, and it means that more people are going to get into situations that aren’t great and are going to have to sell their properties perhaps faster or cheaper than they have in their own right,” Bolton says.
“Saying that it will bring home prices down would be a long way off, but there’s a lot going on right now that is likely to drive home prices down — raising interest rates, removing the interest deduction for real estate investors.
“You’re superimposing these things plus Covid, plus the CCCFA changes and I think it’s just another thing that affects the housing market.”
Bolton founded mortgage brokerage Squirrel and was previously General Manager of Products at ANZ. He started a petition calling for the CCCFA to be reworked, because he says it will financially harm many people.
The emergence of non-bank lenders
Bolton estimates that non-bank mortgage lenders currently make up about 3 per cent of the housing loan market, but external evidence suggests this could rise to 10 per cent under Malaysia’s anti-corruption law.
This will happen, he says, because under the CCCFA, CCCFA’s top bank managers and directors can be personally fined $200,000 if their bank does not comply with the rules. Because banks are so large, there can be up to five steps between the banker on the ground giving the loans, and the personally responsible CEO if the loan doesn’t comply.
The executives of non-bank lenders are generally closer to the procedure and therefore will feel more secure in signing on for the loans.
For consumers, this drive toward non-bank loans means higher interest costs.
Homeowners may pay 3.6 percent or 3.7 percent with the bank, and they can pay anywhere from 4.5 percent to 7 percent with a nonbank. So there will be much higher interest costs,” says Bolton.
“I think you’ll see more incorporation fees and things coming back into the equation, just because of the amount of paperwork and the time it takes to process a mortgage now.
The most affected are the most affected
Pierce is part of a group expected to be particularly heavily influenced by the CCCFA – first home buyers.
“It will be difficult for them to prove they can afford the mortgage, and there will be a lot of paperwork,” Bolton says.
“They will have to prove they can live like a church mouse in advance.”
Older borrowers are another affected group, Bolton says, because they have fewer years of work ahead, which means they only qualify for shorter mortgage terms, which come with larger payments.
Katrina Shanks, chief executive of New Zealand Financial Advisors, has written to Commerce Secretary David Clark outlining concerns about the impact on first home buyers, and says the reasons for rejection are irrational.
“Some of the stories almost defy logic, like being refused a loan, or having the amount reduced dramatically because you’re spending so much on coffee and takeaway,” she says.
Clark announced Friday that the Council of Financial Regulators (COFR), which includes the Reserve Bank, the Treasury, the Financial Markets Authority, the Department for Business, Innovation and Employment and the Trade Commission, will submit an investigation into whether lenders are implementing the CCCFA as intended.
At the time of the announcement, he acknowledged that lenders were more conservative, but said it was unclear if this was due to other factors, such as interest rate increases and LVR changes.
“The investigation by the COFR will determine the extent to which lender behavior is, in relation to the CCCFA, an important factor in changes to banks’ lending practices,” he said. Things.
Credit crunch in full swing
Economist Tony Alexander conducts a monthly survey of mortgage advisors, and says the numbers show the credit crunch is already at its peak.
In July, there was only a slight trend for mortgage advisors to respond, saying banks were becoming less willing to lend.
By December, more than nine in 10 mortgage advisors reported that lenders were less willing to make loans.
Alexander says the CCCFA is being felt strongly, but as banks become more familiar with the new rules, he expects them to become less conservative.
Rejections are also expected to decrease as people adjust their spending to the new rules.
After three months they’ll come back to the bank and say: Look, I told you I could stop drinking for three months. Because people have to prove it now,” he says.
Alexander says the CCCFA, however, will continue to discourage lending.
“This is a structural change in the availability of credit in New Zealand, and it will have a sustainable impact on the housing market,” he says.
Robert McCulloch, an economist at the University of Auckland, says most economists are against heavy government intervention when it comes to lending among willing and informed borrowers and lenders.
“There’s a view these two guys know best about what’s best for them, and you don’t want a heavy hand from government,” he says.
“You can prevent someone from taking out a loan and really hurt them.”
Economists look for market failures when forming judgments about which interventions are needed, McCulloch says, and when it comes to mortgages, failures don’t seem to exist.
ANZ data from September shows the home loan arrears rate of 0.5 percent, which means one in 200 borrowers has defaulted. McCulloch also notes that mortgage risk has already been reduced by loan-to-value ratios (LVRs) requirements and will be further mitigated as debt comes to income requirements.
MacCulloch says there are legitimate concerns about predatory lending and going to those who can’t pay the debt.
“Predatory lending is more than where you get people to walk around in low-income communities and sell things and say to them, someone who can’t really buy them: ‘You don’t have to pay any money just sign here.'”
There is still a rush to get the ladder
Pierce may have been lucky enough to get pre-approved, but he’s still not positive about this year, although some experts have predicted a slight price drop.
His mentality has always been to get a home before the borders reopen.
“While working in aviation, I’ve been talking to a lot of people abroad and in New Zealand who either want to come back to New Zealand and buy, or still want to invest in New Zealand, because they can’t see themselves moving abroad,” he says.
If necessary, Pierce says he’s willing to forego the ability to use KiwiSaver and a HomeStarter grant and buy investment property somewhere cheaper.
“It’s not something I want to do, but if it’s the only way to get to the ladder, this might be what I have to do.”
There is a mentality in New Zealand to support local tourism and hospitality companies, Pierce says, and he supports that, but to get on the property ladder, these are the luxuries he can’t afford.
“I am a person who loves to help others and support businesses in progress. But I just realized if I was going to introduce myself, even though I am very young, and as terrible as it sounds, I have to kind of turn a blind eye.”