LVR restrictions may ease! Is the housing market's 16-month ordeal coming to an end? A former Reserve Bank governor weighs in

The Reserve Bank of New Zealand announced this Wednesday that it is considering changes to the current loan-to-value ratio (LVR) rules for owner-occupiers. LVR is the amount a bank lends as a percentage of a property's value. The changes could take effect on 1 June this year and are currently open for public consultation.

 

Under the current rules, lending with an LVR above 80% is limited to 10% of lending, while investor lending with an LVR above 60% is limited to 5%. The new rules would increase the share of lending permitted with an LVR above 80% to 15%, and impose a 5% limit on investor lending with an LVR above 65%.

 

 

The Reserve Bank said it hopes to promote the long-term stability and healthy development of financial markets by using LVR restrictions to control high-risk mortgage applications. Its ultimate aim is to make lending approval requirements in the banking system more flexible and strengthen households' financial resilience.

Reserve Bank of New Zealand Governor Adrian Orr

 

For New Zealand home buyers and borrowers, the past 16 months have been painful. Since the Government amended the Credit Contracts and Consumer Finance Act (CCCFA) in December 2021, the property market has suffered repeated blows, compounded by steadily rising mortgage rates. House prices across the country have continued to fall to varying degrees. These market conditions have seriously undermined people's enthusiasm and confidence in buying a home. Sales volumes have fallen sharply in property markets nationwide, with buyers either struggling to secure mortgage finance or settling for cheaper properties.

Former Reserve Bank Governor Don Brash

 

YIJU New Zealand also conducted an exclusive interview with former Reserve Bank governor Don Brash, now chair of the board of ICBC New Zealand. He said the timing of the Reserve Bank's adjustment had surprised him somewhat, as well as the market, but that it was not a major change. Most banks are currently very willing to lend, yet many prospective homeowners cannot afford a deposit. For ordinary borrowers, this could therefore be good news.

 

Leading New Zealand economists also have their own views on these issues.

 

The first perspective

Concerns about changes to the LVR rules

 

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CoreLogic chief economist Kelvin Davidson said LVR restrictions limit commercial banks' ability to lend prospective home buyers enough money, leaving buyers unable to secure sufficient funds for the property they want. He said the Reserve Bank introduced LVR restrictions to guard against the possibility of large volumes of bad and unrecoverable loans in the banking sector following a sharp fall in house prices.

 

Davidson also said that although the proposal is still open for public consultation and changes may not take effect until 1 June, he considers it essentially a done deal. That means once the new rules take effect, demand in the property market will pick up, with some first-home buyers and investors considering a return to the market.

New Zealand house prices have fallen sharply since LVR rules were tightened and interest rates began rising

 

Does this mean brighter days are just around the corner for the housing market?

 

Not necessarily! Davidson believes the debt-to-income ratio (DTI) rules due to be introduced in March next year are more likely than LVR restrictions to deter buyers, particularly investors, from entering the market. He expects the DTI limit to be set at 7, meaning someone with an income of NZ$100,000 could borrow up to NZ$700,000 from a bank. This means investors who already have a mortgage on their own home would find it difficult to obtain another loan for a rental property. He explained that DTI rules establish a direct link between house price growth and income.

 

Property Investors' Federation vice-president Peter Lewis holds a similar view, saying the LVR adjustment will have a greater impact on the property market. He believes the removal of mortgage interest deductions is more important for investors, but that this seems unlikely to happen in the short term. This leaves people reluctant to buy residential investment properties, because whatever they buy could lose money. Investors are waiting for the outcome of the election later this year, while the rental market outlook is even more uncertain. Some investors are being forced out of the property market; others are hanging on, having to contribute NZ$500 from their own pockets each week to meet mortgage repayments. Some landlords with good tenants are considering selling when their tenancies end…

 

Lewis is concerned about these market conditions, suggesting that the number of homes available to rent may decline over time. He expects these negative effects to emerge over the next few years, ultimately leading to a more severe shortage of rental housing.

 

The second perspective

Welcoming changes to the LVR rules

 

Infometrics chief executive and chief economist Brad Olsen takes a different view. He sees no harm in changing the LVR rules, saying the changes could help stabilise the housing market sooner by bringing in more buyers. He does not believe this will bring about a major shift in the market, as house prices and mortgage rates remain relatively high. These still present a considerable challenge for all prospective buyers, who struggle to overcome this barrier.

 

Chris Farhi, head of insights and data at Bayleys, is also relatively positive about the LVR rule changes. He considers them meaningful and believes they will have a positive effect on the market. However, compared with such a small adjustment, he believes rising interest rates and the ability to meet mortgage repayments at high rates are likely to be the biggest constraints facing many borrowers applying for loans.