The housing market has traditionally been a key funding source for businesses and also entrepreneurs looking to have a crack at an investment. The balance sheet was leaned on. Clever business bankers dressed up business loans in housing attire.
Those days look to be ending, one reason being the Credit Contracts and Consumer Finance Act (CCCFA) which requires far more perusal of income and expenses, with stricter verification required. The bank’s approach to lending is now more standardised (you either tick boxes or you don’t) with less flexibility.
Hopefully the inquiry being led by the Ministry of Business Innovation and Employment (MBIE) realises that the practical and literal application of the legislation has gone too far. Banks are not in the business of irresponsible lending. Non-performing housing loans are around 0.2 percent of total housing loans.
Even if tweaks occur, the spirit of the CCCFA will remain with more hurdles and questions to get a loan. For many banks, the CCCFA should be accelerating system upgrades, which is not cheap. There is likely to be greater separation between a business loan versus a housing one.
Non-bank share of lending has been rising prior to the CCCFA. It has been accentuated by the implementation of the CCCFA.
Non-bank lending institutions accounted for 1.6 percent of the total home lending market (the stock) in January 2022, up slightly from 1.1 percent in January 2021 and 1.4 percent in September 2021. Non-bank lenders’ share has roughly doubled in the past five years, coming off a low base.
The overall market share or stock numbers mask a more telling trend. Non-bank lenders wrote 6.5 percent ($467 million) of the net rise in home lending in the December 2021 quarter. Non-bank lenders have gone from writing less than 2 percent of new home loans each quarter a year ago to more than 6 percent now.
Building societies expanded mortgage lending 15 percent in the year to August, with finance companies growing 50 percent according to the Reserve Bank’s November Financial Stability Report. That is a big shift. Whether that sort of growth can be maintained is open to debate.
Capital could be a constraint for some non-bank home lenders. Non-bank deposit takers with small scale face challenges and consolidation may take place across the sector. The housing cycle has turned just prior to non-banks significantly writing a lot more loans.
A similar story is apparent in business lending. While non-bank lending institutions represent a small component of business lending, lending growth is faster which has seen non-bank lenders share rise from 5.8 percent to 6.1 percent in the past year.
Anecdotal feedback is one reason behind the rise, with greater flexibility across non-bank providers. Deals are not just put through a black box. As banks have focused more and more on the home loan market, staff attrition and cost-cutting has removed critical business credit lending skills, and ironically, many have appeared working for non-banks. Mortgage brokers (who act as a connection point with banks), need not have the expertise to pitch an implicit business deal through banks processes. Tailored and boutique solutions are often required and the people who can make such deals work.
It has been getting progressively tougher for businesses to obtain credit for many years. A net 71 per cent of businesses expect it to be harder to get credit over the coming year according to ANZ’s Business Outlook Survey. It has been negative (harder) since 2016 and trending lower.
It has been fascinating to see the response to the CCCFA from industry players including mortgage brokers and borrowers. Where have the champions been for businesses who have been finding it tougher year after year and recently also caught in the CCCFA noose?
New Zealand is not going to get wealthy selling more expensive houses to each other. We need to see more lending directed into the business sector and competition. Movements towards non-bank lenders is a natural consequence of the big-four bank dominance slowly being eroded, albeit they still hold huge market share. Gaps are appearing in the market for boutique solutions though. This is being accentuated by the CCCFA making it more difficult to package facilities and borrowing that many businesses need which can no longer go through under the guise of a home loan.
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