Commerce Minister David Clark defends stricter scrutiny of borrowers as housing affordability hits new low

A 2021 law change requiring stricter scrutiny of borrowers' financial health was necessary to protect "vulnerable lenders", according to Commerce Minister David Clark.

His comments in Parliament on Thursday came just before new Real Estate Institute (REINZ) data showed housing unaffordability had hit a new record: it now takes 11.7 years for Kiwis to save a house deposit, up from 9.3 a year ago. 

The average property across New Zealand is now 8.8 times the average annual household income, up sharply from 8.3 just three months ago, according to REINZ's findings. 

Last month REINZ pointed some of the blame at the Government's amendment to the Credit Contract and Consumer Finance Act (CCCFA) in December, which requires stricter scrutiny of borrowers' financial health. 

ASB chief executive Vittoria Shortt has said: "We are seeing an impact of around 7 percent of customers that we would have liked to lend to, but have not been able to, given these changes." 

Clark, speaking in Parliament, said the CCCFA changes were necessary because the Government "wanted to make sure that vulnerable lenders are protected". 

"A 2019 review into the financial sector found that around 18 percent of New Zealanders found themselves in either moderate hardship on an everyday level or severe hardship on an everyday level as a result of lending that was unaffordable for them - a significant problem."

But since the CCCFA changes, bank customers have reported having loans declined based on spending too much on takeaways and Christmas shopping

In Parliament, ACT MP Damien Smith spoke about a man who applied to have his credit limit increased by $500 and was confronted with 15 pages of forms, despite never having missed a payment in the seven years. 

"I can't, obviously, speak to that individual's circumstances, nor to the individual bank's policies on this matter," Clark responded. 

"Different banks are putting different responses in place, as you'd expect in a competitive market, and members are free to shop around and look for a bank that better meets their needs.

"It should be noted that lending commitments usually fall in December, and that total lending commitments for December 2021 were higher than they were in December 2017, December 2018, and December 2019."

Commerce Minister David Clark and Prime Minister Jacinda Ardern.
Commerce Minister David Clark and Prime Minister Jacinda Ardern. Photo credit: Getty Images

Clark brought forward a planned investigation into the new home loan regulations amid concerns banks were adopting too hard a line with the guidelines. 

"This review began within a couple of weeks of issues appearing," he said. "We want to make sure that this legislation is working as it was intended when National, ACT, and every other party in this Parliament supported it."

To make matters worse

On top of the CCCFA changes, the Reserve Bank tightened restrictions on lending in November, with a 2013 measure known as loan-to-value ratio (LVR). 

LVRs were removed in response to the economic impact of COVID-19 in 2020 and later reinstated in March last year. 

Banks are now only able to lend 10 percent of their new lending to owner-occupiers wanting to borrow more than 80 percent of a house's value. For investors it's at a maximum of 5 percent of new lending to borrow more than 60 percent of a property's value.

According to REINZ, currently 48 percent of household income is required to service an 80 percent LVR mortgage, based on the average property value, with the mortgage over a 25-year term. It's up from 33 percent in 2020. 

The Reserve Bank has been creeping up interest rates to cool down the housing market - a fire it started after dropping interest rates to record lows to keep money flowing during the COVID-19 economic downturn. 

ASB chief economist Nick Tuffley says interest rate increases look set to come steadily over 2022, even as New Zealand braces for the impending wave of Omicron to sweep over.  

"The reality is that inflation pressures have intensified in the three months since" the Reserve Bank increased interest rates, Tuffley says. 

The price of goods and services in New Zealand increased 5.9 percent in the last three months of 2021 compared to the same period in 2020, according to Stats NZ. It was the biggest jump since a 7.6 percent annual increase in 1990.

Median prices for residential property across New Zealand increased 20.5 percent from $730,300 in January 2021 to $880,000 in January 2022.
Median prices for residential property across New Zealand increased 20.5 percent from $730,300 in January 2021 to $880,000 in January 2022. Photo credit: Getty Images

To make matters worse, rent affordability has reached a new low. According to the Real Estate Institute, rental costs now absorb 22 percent of average household income. 

The Ministry of Business, Innovation and Employment (MBIE)'s Tenancy Services Rental Bond Data release for December 2021 showed median rents nationwide reached $540 per week, up $50 from last year - the highest yearly increase on record. 

For most Kiwis, buying a house instead is not realistic. Median prices for residential property across New Zealand increased 20.5 percent from $730,300 in January 2021 to $880,000 in January 2022, according to REINZ. 

There are some good signs. Annual figures for the last nine months of 2021 showed more new homes were consented than ever before - 48,522 in November, up 26 percent on the same period in 2020. 

And in a rare display of bipartisanship, Labour and National in October jointly announced a law change to speed up the process of forcing councils to allow more apartment blocks throughout the biggest cities in New Zealand. 

Tier 1 councils - Auckland, Hamilton, Tauranga, Wellington and Christchurch - must enable intensification in their plans by August 2022, brought forward by one year. The new law allows three homes up to three storeys, to be built on most sites without the need for resource consent. 

But in the meantime, while the housing supply gap is filled, the financial pressure is on.