A couple of things happened last week, following my story about banks blocking first home buyers from small (and therefore affordable) apartments. If you haven’t read that story, it might be worth doing so before reading this one. Think of this as Part Two.

First, I received dozens of emails from mostly young people telling their beat-your-head-against-the-wall-in-frustration stories of trying to get a mortgage to buy a small apartment – and being turned down by the banks because they wanted to use their apartment as security for the loan but didn’t have a 50 percent deposit.

Fifty percent.

How small is too small for banks to lend money on? Click here to comment.

Some would-be buyers ended up with no choice but to carry on renting, a few bought a house bigger than they needed and with a mortgage costing more than they felt they could really afford.

Because the crazy thing was, they said, the banks were happy to lend them a big amount on a (relatively) expensive house, but weren’t prepared to give them a smaller amount on a cheap apartment.

Second, this week, came the announcements that not one, but two big new apartment complexes were going to be built in Auckland. The first was revealed with much fanfare by Auckland Council. The $452 million, 21-storey building above the Aotea City Rail Link station will bring 10 floors of different sized apartments to the CBD, sometime in the middle of the decade. 

And Manaaki, the latest development from apartment builder Ockham, will have 210 apartments in four blocks in Onehunga, including an “array” of small-sized pads.

But if the experience of the dozens of readers who contacted me this week are anything to go by, first home buyers will struggle to buy small apartments in either of these complexes. Because New Zealand banks just don’t want to lend on apartments.

Not in Auckland. 

Not anywhere else.

Take Candis Hawkins. She works for Sealord in Nelson and was looking for a small place.

“I wanted to buy an apartment in this development, with an asking price of $315,000, and I had a 20 percent deposit. The bank said I would have to have 35 percent because it was 50sqm, or I could have pre-approval for $460,000 as long as it was not for an apartment.”

The bank wouldn’t lend Candis Hawkins $252,000 on an apartment in this development, but would give her $460,000 for a house.

It just didn’t make sense.

The bank was willing to lend Hawkins up to $460,000 for “a cinderblock 1960/70s sh*t hole that needs mega work”. But it wouldn’t lend her $252,000 for an apartment. 

“I’m 39, single, with no kids and a stable job,” she says. “An apartment is perfect.”

It wasn’t the quality of the apartment, Hawkins says. The banks didn’t even check that out. It was purely the size. 

‘Bank-friendly’ sizes

In the real estate trade they talk about “bank-friendly” apartments – ones big enough that it’s worth showing first home buyers around with them having a hope in hell of getting a mortgage with a 20 percent deposit while still using the apartment as security for the loan. 

Registered financial adviser Scott Lewis has a list.

ANZ’s rules are the strictest: a 50 percent deposit is required for a studio or one bedroom apartment less than 45 sqm; you will also need 50 percent for a two bed place less than 55 sqm, or for a three bed flat less than 65 sqm with ANZ. Oh, and the square metre requirement excludes the balcony.

ASB and Kiwibank have a minimum acceptable size of 40sqm; it seems they just won’t lend on anything smaller than that. Westpac might lend under that size, but want a big deposit – often 50 percent.

BNZ looks for 35 percent under 50sqm. 

“The banks’ square meterage and deposit rules make zero sense in terms of helping people get into their own properties and getting out of paying other people’s mortgages,” Hawkins says.

Tania, another Newsroom reader who contacted me put it this way: “Your article summed up the rage at the banks and the confusion between government rhetoric and how I was being treated in the real world.” 

Are apartments really more risky?

The banks argue apartments are more risky. TSB told Newsroom the more strict criteria for small apartments “is in place to protect our customers when they enter into a loan contract, because the smaller this type of property, the more the customers resale value is vulnerable to market fluctuations which aren’t typical in the standard residential housing market”.

BNZ talked about being “a responsible lender and making sure we meet our obligations”. Kiwibank said: “Our experience has been that small apartments show greater volatility in values – especially in a downturn.” 

Newsroom asked all the major banks to tell us what evidence they use when making their blanket decisions about small apartments. Sales figures showing drops in value, for example, or mortgage defaults.

None of them provided anything.

Mark Todd, co-founder and director of Auckland apartment builders Ockham Residential, believes that’s because the evidence simply doesn’t exist.

“The small apartment market is a stable, liquid market, not any riskier than other part of the market,” he says.

Mark Todd says small apartments aren’t riskier than any other part of the market. Photo: Supplied

Figures suggest in some ways apartments are a better buy than houses, says Kevin McHugh, New Zealand publisher for product comparison site Finder.

“Data from Global Property Guide suggests that apartments – especially smaller ones – return higher rental yields than houses. In 2020, rental yields on apartments ranged from 6.09 percent to 7.18 percent in Auckland, and 6.88 percent to 8.43 percent in Wellington. At the same time rental yields on houses were around 3.41 percent in Auckland and 5.5 percent in Wellington.”

Finder predicts apartment prices will grow by 9 percent in Auckland and Wellington over the course of 2021, and by 6 percent in Christchurch and Dunedin.

Todd reckons the banks’ attitude to small apartments is a throw-back to the problems after the global financial crisis in 2009.

He says there was a period 20-odd years ago when there were a whole load of shoebox apartments built – for example on Auckland’s Hobson Street or Nelson Street. Many were poorly designed. “Adequate” is how Todd describes it; certainly they were affordable.

A hangover from the GFC

But when the GFC happened, some of those buildings “destroyed value”, he says, and banks panicked.

“The rules got tough when banks thought the sky was going to fall down in 2008-2009. There was a lot of supply of those small apartments and fears they would drop in value.”

Did the bottom fall out of the market?

“There was a stagnation and modest drops,” Todd says.

But times are different now. Like there’s a massive housing crisis, with thousands of first home buyers – young singles or couples – desperate to get onto the housing ladder.

And the rules have tightened up on apartment design, he says. 

Even taking the rubbish apartments out of the housing equation, real estate agents told me there are thousands of well-designed small apartments that would be perfect for first home buyers – but aren’t available because of the mortgage size requirements. 

Take Ockham’s ‘Daisy’ complex in Auckland’s Mt Eden, opened in 2018 with a 10-Homestar certification – the highest green building rating. 

Broadcaster Mike Hosking slated ‘Daisy’ for its lack of carparks – just one pool car called Daisy the Yaris. That just boosted sales. Photo: Supplied

It’s not about to leak or fall down. Certified. And it’s not losing money for owners, Todd says. In fact Peter Rowney, the body corporate chair, told him “there is currently a queue of owners wanting to buy into Daisy but no one wanting to sell”.

Meanwhile, off-the-plan sales for Ockham’s new 210-apartment Manaaki complex in Onehunga begin this week.

“It’s a liquid, bona fide, real estate market,” Ockham’s Mark Todd says. “These apartments have stable value and the apartment market is as liquid as any other market.”

Ironically, one of the reasons the small apartment market hasn’t gone ballistic in the same way the housing market has over the last decade, is probably because all those first home buyers that might be pushing demand up if the banks would lend to them, aren’t even looking.

“It’s a hangover from what was happening 10, 15, 20 years ago,” Todd says. Institutional stasis. 

“I try to arrange tours for bank lending managers through our buildings. They aren’t interested.”

It’s immoral, unethical and very unhelpful to have a blanket policy. It’s actively precluding people buying something they can afford in the area they want to live.”
– Mark Todd

Todd understands why banks might not be keen to lend if a building has a history of leaking, or poor quality construction. But that’s not the case with the majority of apartment blocks.

“The banks know which buildings have problems with leaky structure and they could blacklist them.

“But it’s immoral, unethical and very unhelpful to have a blanket policy. It’s actively precluding people buying something they can afford in the area they want to live.” 

And it also means companies building apartments are far less likely to include small apartments in their developments – reducing the supply of the most affordable flats.

“We did build several 37 sqm apartments at Daisy but these were harder to sell, thanks to our friends at the banks. We haven’t gone under 40 sqm since,” Todd says.

A small apartment in the ‘Daisy’ building. Photo: Supplied

“Banks are doing everything they can to stop people buying by applying outdated risk modelling,” another reader, Gary Patterson, wrote to me this week. “In Auckland, apartments are being built to alleviate strain on our motorway system and encourage people to live/work closer to the CBD.

“Then why hinder their ability to purchase a sub $500k apartment at say 10 or 20 percent deposit?”

Patterson has a theory. “Is this protectionism to the investor market, particularly institutional investors? A flood of new homeowners taking hold of that section of the market would surely see a slump in someone’s property portfolio, triggering a release of investment property back into the market and creating a cooling effect with the simple economics of supply and demand.”

So what is to be done? 

I spent a lot of the past week sending emails to anyone I could think of asking that question. What are you doing about this?

I wrote (again) to the banks – their media people and this time to their chief executives as well. I wrote (again) to Ministers and Government departments – Megan Woods at Housing, Grant Robertson in Finance, also Treasury, the Reserve Bank, Housing and Urban Development, MBIE, the Banking Ombudsman, the Bankers’ Association.

ANZ, ASB and Westpac didn’t reply. Not their spokespeople; certainly not their chief executives.

The Banking Ombudsman’s office said: “We can’t be very helpful here as it’s not within our jurisdiction at the Banking Ombudsman Scheme to investigate these particular bank commercial decisions around the terms of lending.”

The NZ Bankers Association: “As you know, lending criteria is a decision for individual banks and there is no collective bank view. To get a better picture you will need to approach the banks directly.”

Thanks for the tip.

The association also sent a statement, which it said Newsroom could attribute to chief executive Roger Beaumont. “Banks make their own individual risk-based assessments on all lending applications on a case-by-case basis. This will take into account the risk and security of the asset.”

Take it from our readers, your banks really don’t look case-by-case, Mr Beaumont. Not when it comes to small apartments.

And in case you don’t believe me, here’s Lena’s story:

“I found a 34 sqm studio apartment, part of an Auckland Council Special Housing Area. I met all the criteria, so approached my bank (ASB). They emailed me: ‘Our credit team have advised that the 40 sqm is currently a fairly hard and fast rule here – balconies aren’t included in the total area for this calculation, and I’m also advised that the level of deposit won’t make a difference either. The bank will not want to take a mortgage over an apartment of that size I’m afraid’.”

Or this from Gina Lockyer: “My husband and I have been happily living in our 42 sqm apartment in Wellington, which we purchased about two years ago. 

We were really focused on apartments for affordability and to have a smaller footprint. We like being near the city and we didn’t want a backyard.”

Lockyer and her husband tried for a mortgage with a 20 percent deposit and were flatly refused. So they managed to pull together the required 50 percent deposit on the $400,000 apartment, using both their KiwiSavers, loans and gifts from family, and personal savings.

And even then, they got turned down by two banks which flatly refused to lend on a small apartment, before finding a bank that would.

And as for the risk from a small apartment? Lockyer says over the last two years the value of their place has gone up almost $100,000. On a $400,000 apartment.

Not our problem, says Housing Ministry

Back to responses from the powers that be. A spokesperson at the Ministry of Housing and Urban Development said: “Unfortunately we are not the best Ministry to answer this question. We recommend you contact the Reserve Bank media@rbnz.govt.nz.

And Housing Minister Megan Woods’ office said much the same thing.

“Having sought advice, it isn’t really something the Minister of Housing can talk to. It seems like maybe more of a Reserve Bank question or one for individual lenders.”  

Silly me, I’d thought that something that could free up thousands of homes for first home buyers who at the moment are priced off the property ladder might be something of interest to ministers and departments tasked with finding fixes for the housing crisis. 

Perhaps the clue is in the job description. Woods is the Minister of House(ing), not Apartments.

And the Reserve Bank?

“Retail bank lending policies are commercial decisions made based on perceived risk profiles. The Reserve Bank does not have a mandate to compel banks to lend to a particular sector of the economy,” a spokesman said.

“We was getting nowhere”, as Bernard Cribbins said in his famous-in-my-household-anyway song Right said Fred .

“And so we had a cuppa tea”, and then I contacted Chlöe Swarbrick, the Green Party’s new(ish) MP for Auckland Central. 

Maybe Swarbrick doesn’t know the rules: fob off journalists at all costs. Tell them it’s not your responsibility, to try someone else.

Swarbrick called me. 

Chlöe Swarbrick is calling for more information from RBNZ and Treasury on bank lending to first home buyers for small apartments. Photo: Marc Daalder

Since the first Newsroom article  on the topic, and the blank looks she got when she asked Reserve Bank Governor Adrian Orr and Deputy Governor Geoff Bascand about the issue at a Finance and Expenditure Committee meeting (see here from around 1hr 39min, if you want to watch the exchange – it lasts around 21 seconds), Swarbrick had been doing some digging too, she told me. 

She’d been thinking about what she could most usefully do as a parliamentarian to solve the problem. And by the way, the problem wasn’t pesky journalists asking annoying questions, it was the problem of people, often young people, priced out of the housing market.

Swarbrick wondered if finding a solution to the problem of banks refusing to lend on small apartments might be helpful.

She thought potentially asking questions in Parliament could be the way to go, she told me, but these questions didn’t necessarily get much traction, she said.

Reserve Bank top brass Geoff Bascand and Adrian Orr look for guidance after a question on bank deposits for small apartments. Photo: Parliament

Instead she decided to focus on the Reserve Bank. 

“I’m drafting a letter for the Finance and Expenditure Committee to send to RBNZ, because RBNZ is accountable to the committee.” The letter will be considered by the committee at its meeting on Wednesday and if approved, will go through to the Reserve Bank next week.

The letter talks about the small house problem and the fact Minister of Finance Grant Robertson has asked the RBNZ to take house prices into account when making monetary policy decisions. 

“It’s surprising deposit requirements as high as 50 percent are preventing first home buyers from purchasing these small apartments. It’s even more surprising the Reserve Bank seemed unaware.”
– Chlöe Swarbrick 

The letter talks about a “bipartisan appetite” across Parliament to see more New Zealanders able to afford to buy their own homes and how small apartments can be a good option, especially for younger first home buyers.

“They can enable people to live close to where they work and socialise, helping our cities be vibrant places with lower carbon emissions from commuter transport. The Government’s National Policy Statement on Urban Development recognises the increasing role medium and high-density housing must play in our major cities,” the letter says.

“So, it should be surprising to learn that deposit requirements as high as 50 percent are preventing first home buyers from purchasing these small apartments. But it was even more surprising that the Reserve Bank seemed unaware.

“I seek your leave for the Finance and Expenditure Committee to request further information from the Reserve Bank and Treasury on this specific issue, such as a briefing,” the letter ends. 

“This is an opportunity for RBNZ to issue a directive or investigate other ways of excavating the blocks in this,” Swarbrick tells Newsroom. 

It may not be in their mandate to force decisions on the banks over commercial lending, but perhaps there’s a way to suggest to the banks what they might do.

Too right, says Ockham’s Todd.

“Politicians need to stand up and tell the banks to do the right thing. The apartment market is stable and liquid, small apartments have value and should be treated with the same deposit criteria, so young people and first home buyers aren’t penalised.

Todd says these days Ockham doesn’t build apartments below 45sqm because it knows a good proportion of the potential market won’t be able to buy them. But if the banks changed their rules the company would look at building cheaper, smaller places.

“Without those bank rules, there would be a wider spread of price points available in new projects,” Todd says.

Oh, and while Jacinda Ardern and her ministers are looking at the issue, Todd says, a bit of pressure on Auckland Council not to put so many roadblocks in the way of small apartment sizes and high-density housing would be helpful too. 

“Over the last 10-15 years Council has pushed back by having a strong emphasis on minimum apartment size. Council is trying to force people to build big apartments and is stigmatising small, affordable studios, say 35sqm. 

“There is a strong ethos in council that small apartments are bad, so there are a whole lot of rules that shouldn’t be there.”

The Government could set the rules, Todd says. Failing that, the Reserve Bank and the Prime Minister could “jawbone banks” into changing their stance. They’ve just got to set the priorities. 

“Why is the Prime Minister not coming out saying ‘You know what Chlöe, I agree with you’?”

Why indeed.

POSTSCRIPT: Just before publication of this story, I received an updated statement from Housing Minister Megan Woods. 

“The Government is considering a range of initiatives to improve affordable housing supply, and options for first home buyers that could include apartments.

“At this point in time, the amount of deposit required by banks is still a commercial decision to be made by banks.

Housing Minister Megan Woods’ statement that “at this point in time” the level of deposits on apartments is “still” up to banks could be a ray of light for first home buyers. Or not. Photo: Lynn Grieveson

“Officials understand from earlier consultation that the bank’s deposit requirements will be related to Reserve Bank regulation and expectations of how the resale value of apartments might fare during a recession. Banks base these expectations on past experience.”

That phrase “at this point in time” and the word “still” might give cause for optimism for first home buyers. Or then again, it might not.

Let’s see.

Nikki Mandow was Newsroom's business editor and the 2021 Voyager Media Awards Business Journalist of the Year @NikkiMandow.

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