Monthly mortgage lending of $8 billion drives banks' $1.45b profit

Wednesday, 22 September 2021

The prices of homes marketed to first-home buyers has been rising sharply, but fewer first-home buyers are borrowing more than 80 per cent of the value of homes.

Banks posted collective profits of $1.45 billion in the June quarter, driven by an $8b-a-month home loan boom.

The lending boom included just over 3000 loans each month to first-home buyers, KPMG’s quarterly report on banks showed.

But there were indications that fewer first-home buyers were making it on to the property ladder under their own steam, the report’s author John Kensington, KPMG’s head of banking and finance, said.

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Despite a sharp rise in first home prices, the proportion of first-home buyers taking out loans of more than 80 per cent of the price of the home they were buying fell compared to the previous three months, Kensington said.

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“A third of first-home buyers borrowed over 80 per cent, this was half the proportion in the two previous quarters,” he said.

There may be several factors behind that, but it probably included fewer people getting into homes without help from parents and grandparents, he said.

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“I think it is probably parents or other people chipping in, but I think it is also banks being careful, and perhaps not being quite so willing to do quite the same quantity of high loan-to-value ratio loans,” Kensington said.

This was a sign that the Reserve Bank Te Pūtea Matua's clampdown on high loan-to-value lending was having an effect, he said.

“Fear of losing out”, or FOMO, may be spurring first-home buyers to do all they can to get into their own homes, and for their parents and families to dig deep to support them, Kensington says.

“There’s probably a little bit of FOMO, with parents saying, ‘You have to get into the market’,” Kensington said.

Low interest rates, and high rental costs encouraged people to get into homes of their own, he said.

In addition, Kensington said people coming back to New Zealand from overseas, bringing capital with them, were also counted as first-home buyers.

Banks’ overall lending increased by 2.2 per cent from the first three months of the year, with bank loans reaching $474b. Banks’ home loans increased by more than 6 per cent.

Despite the boom, bank profits were down 11 per cent in April, May and June, compared to the record-breaking profits they made in the first three months of the year.

It still marked a big improvement for banks on April, May and June last year, when they made combined profits of $770 million as the country endured a nationwide Covid lockdown, Kensington said.

But while home lending was booming, lending to businesses and farmers was dwindling as a proportion of banks’ loan books.

Business lending dropped to less than 20 per cent of banks’ combined loan books.

That did not include agri loans, which dropped to just 12.5 per cent of banks' combined loan books

Kensington said some agribusinesses might have been using profits from high commodity prices to reduce their debts, some at the insistence of their banks.

But he also believed businesses in many sectors could be holding back on investing as a result of uncertainty stemming from the Covid pandemic.

Banks costs rose as they invested in large-scale technology transformation projects to modernise their systems, and hiring people to help them cope with tougher regulations, which included the requirement to treat customers fairly.