LVR restrictions have done the job, or at least in the words of Deputy Governor Christian Hawkesby: “The risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency.”
The Reserve Bank of New Zealand is proposing to ease mortgage loan-to-value ratio (LVR) restrictions, with a final decision slated for 1 June this year.
The move will ease LVR restrictions from:
- 10% limit for loans with LVR above 80% for owner occupiers, and
- 5% limit for loans with LVR above 60% for investors.
- 15% limit for loans with LVR above 80% for owner occupiers, and
- 5% limit for loans with LVR above 65% for investors.
But will that make a difference to the housing market?
LVRs have been a feature of the housing market since 2013
LVRs were designed to strengthen the banking system by reducing the proportion of people with large mortgages relative to the value of their houses.
Economists might argue about the effectiveness of restrictions. Though, they certainly haven’t dented bank profits.
LVR relaxation at the start of the pandemic prompted a buying frenzy
The last time the Reserve Bank relaxed LVRs was at the start of the pandemic, prompting a buying frenzy that resulted in house prices increasing by about 20% in 2020 – one of the highest surges in the world and at a time the country’s GDP annual growth rate fell to -2.9%.
Two things happened:
- Investors grabbed the opportunity to secure additional properties while the restrictions were eased
- First-home buyers suffered FOMO
LVR restrictions were reinstated in March 2021 to extinguish the frenzy.
The move required investors to stump up a 40% deposit, with owner-occupiers needing a 20% deposit. New builds were (and still are) exempt.
Since average house prices peaked in November 2021 (having risen more than 40% in just two years), property analysts are predicting a peak-to-trough slump of over 20%.
Will anything change?
Theoretically, removing LVRs could increase housing demand and drive-up house prices, but we can’t see much of that in the current environment. Here’s why:
- The principal driver of the property market is interest rates – and they’re still relatively high
- Consumer confidence is at a near-record low
- Economists are tipping a rise in the unemployment rate
- Banks are a prudent bunch – they’re not suddenly going to lend 95%
- First home buyers might get excited – but they’re cautious too, spooked by interest repayments and job security
- Other measures designed to take heat out of the market are still in play, including the Brightline test and tax deductibility rules that removed the ability to claim a deduction on interest payments
But as the saying goes: Economists have predicted nine out of the last five recessions.
So, you know, better to stick with this adage: If you can afford it, now is a good time to buy.
Call 0800 GOODWINS to find a property you can afford. Thinking of selling? We’ll connect you with willing buyers.