Will easing LVR restrictions really reignite the property market? Views from across society

Last week, the Reserve Bank of New Zealand (RBNZ) officially announced that it would slightly ease loan-to-value ratio (LVR) rules from 1 June. In the author's view, the move itself is unsurprising, but its timing is almost a full year earlier than the bank previously indicated, which was around March next year. Clearly, the Reserve Bank of New Zealand has recognised that it is time to start supporting the market. Some commentators, however, say easing mortgage restrictions may not deliver an immediate property market revival.

 

 

By easing LVR restrictions, the Reserve Bank hopes to allow more owner-occupiers to obtain mortgages with deposits below 20%. Commercial banks can currently allocate only 10% of total mortgage applications to these higher-risk borrowers with low deposits, and the Reserve Bank wants to raise this cap to 15% as soon as possible. It also wants to lower the minimum deposit required of most investors from 40% to 35%, while keeping the cap on approved lending to investors below that threshold at 5%. In both cases, commercial banks also have exemptions when assessing mortgage applications for new builds or repairs and renovations. The Reserve Bank is reportedly consulting banks on the proposed changes and aims to implement them before 1 June.

 

CoreLogic New Zealand chief economist Kelvin Davidson

 

An economist's view

 

CoreLogic New Zealand chief economist Kelvin Davidson describes the LVR rule changes as more of a “minor adjustment” than a “complete overhaul”. He believes they will help increase demand for housing loans, but provide only a very limited stimulus to the market. Banks are currently testing mortgage applicants at high interest rates of 8.5%–9%, making it difficult for most applicants to demonstrate sufficient repayment capacity to their lenders. Nevertheless, Davidson believes rising net migration into New Zealand and looser LVR rules will bring some increase in mortgage applications.

 

The Reserve Bank deputy governor's view

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Reserve Bank of New Zealand deputy governor Christian Hawkesby sees the issue differently. He believes the LVR changes are intended to better protect financial stability, while the current settings are relatively tight and make the loan application process “unnecessarily inefficient”. Specifically, he believes the rules “prevent lending to some otherwise creditworthy applicants”, which is clearly inconsistent with the Reserve Bank's lending rules. We also cannot ignore the dilemma facing borrowers. Although New Zealand house prices could fall further, the likelihood of another substantial correction is now low, and more prospective buyers are eager to enter the market. On the other hand, commercial banks' higher test rates mean lending conditions have already “tightened significantly” for most borrowers. How easy can securing a loan really be?

 

 

A mortgage broker's view

 

Mortgage broker Bruce Patten believes the Reserve Bank of New Zealand's proposed LVR changes will have a significant impact on first-home buyers. He explains that the current cap allowing no more than 10% of applications to be allocated to owner-occupiers with low deposits is “nowhere near enough”, particularly as banks hold back some applications to ensure they do not exceed the limit. In practice, some banks simply turn away applicants with deposits below 20%.

 

Asked whether the LVR changes would benefit investors, Patten's answer was no. He pointed out that continuing house price falls have eroded investors' capital gains, and lower asset values mean less mortgage borrowing capacity. Davidson is less certain. He believes investors' demand for mortgages generally tracks the stringency of LVR restrictions. Investors may seize the opportunity to borrow more now, before the Reserve Bank of New Zealand potentially introduces new debt-servicing restrictions next year.

 

 

The Reserve Bank of New Zealand has given commercial banks a timetable to have their systems ready before April next year for the introduction of new debt-to-income (DTI) restrictions on mortgages, as required by the Government. These rules will limit banks' lending to borrowers seeking loans that are large relative to their incomes.

 

 

Patten noted that if DTI rules are introduced, the Reserve Bank is likely to ease LVR restrictions. He does not believe the Reserve Bank of New Zealand would impose tighter lending restrictions while interest rates are high. But if mortgage rates return to 4% and people realise they can afford to borrow more, that would be the time to impose restrictions.

 

Commercial banks' views

 

ANZ economists have assessed the Reserve Bank of New Zealand's proposal to ease LVR restrictions from a broader economic perspective. They worry that any increase in credit availability could undermine the bank's efforts to tackle inflation, potentially driving the official cash rate (OCR) higher. They explain that stimulating the property market runs counter to the Reserve Bank's inflation-fighting efforts. ANZ's economists say they are already seeing signs of hope in the property market and have revised their house price forecast accordingly. They now expect the total decline in this cycle to be 18% from the November 2021 peak, rather than the previously forecast 22%. They believe easing LVR restrictions will effectively accelerate the property market's recovery.

 

Views from the public

 

Darren B: “As long as investors are prevented from deducting legitimate interest expenses, they will not return to the property market, even with an exemption for new builds. This will seriously affect the supply of new housing. Combined with explosive growth in immigration, we will see rents rise rapidly in the second half of this year and in 2024. Sadly, the Government is turning a blind eye to the impact of its interest deductibility policy, and tenants will pay a heavy price.”

Elsa O: “Borrowers still have to pay high mortgage interest regardless, so people will invest cautiously. Ultimately, the property market's direction will depend largely on who wins the next election. All countries with ageing populations need new migrants, but this is a fiercely competitive world. When crime, a high cost of living, housing shortages and a useless education system become our new normal, whether we can attract capable candidates for the governing party will be a crucial question.”

Tim H: “Borrowing NZ$500,000 at an interest rate of 7% means paying NZ$35,000 in interest each year. Even when rates were just 2% during the economic boom, repaying a NZ$500,000 loan was already very difficult, let alone paying higher interest. What makes people think the property market will take off again at current interest rates? The Reserve Bank is simply trying to fight high inflation.”

Welly G: “The LVR changes will have no substantive impact on the market. The biggest issues are DTI and construction costs. LVR is just a bystander.”

Heather A: “I agree with changing LVR rules for first-home buyers, but do not lower investors' deposits. If anything, they should be increased to 45% to discourage property hoarding. We need more owner-occupiers, rather than more landlords.”

 

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