LVR restrictions ease from today! Have house prices really bottomed out? ANZ economists weigh in…

Loan-to-value ratio (LVR) restrictions officially ease from today (1 June). Banks can now allocate up to 15% of their total lending to owner-occupiers with LVRs above 80%, up from 10%. Meanwhile, commercial banks can allocate 5% of new mortgage lending to investor buyers with deposits below 35%, compared with the previous minimum deposit requirement of 40%.

What does easing LVR restrictions mean for New Zealand house prices?

Although LVR restrictions ease from today, many financial market commentators say the change is unlikely to have any significant effect on New Zealand's property market.

CoreLogic head of research Nick Goodall said he did not expect the LVR changes to have much positive impact. The main problem with buying a property with a smaller deposit is that borrowers take on more debt. The property market is currently constrained by higher mortgage rates and higher test rates, with little prospect of improvement in the short term.

Infometrics chief executive Brad Olsen shared this view, saying he did not believe the LVR changes would become a new driver of the property market. He said plainly that, for investors, a reduction in the deposit requirement from 40% to 35% meant taking on greater mortgage repayment pressure to buy another property. He did not believe many investors would do so.

ANZ senior economist Miles Workman said it was difficult to quantify the effect of LVR restrictions on the property market. “Although the recent changes to LVR restrictions are a fine-tuning rather than an overhaul, they do represent an easing of financial conditions.”

Have New Zealand house prices already bottomed out?

ANZ economists recently said publicly that New Zealand's property downturn appeared to have bottomed out, and that they expected house prices to begin recovering gradually. In the bank's latest Property Focus report, its economists said the current surge in New Zealand's net migration and the confirmed easing of loan-to-value ratio (LVR) restrictions from June had raised their expectations of an earlier housing market recovery.

Readers may recall that, earlier this year, ANZ forecast house prices would fall 22% this year from their November 2021 peak. Last month, however, it revised that figure again to 18%. Similarly, in the latest House Price Index report from the Real Estate Institute of New Zealand (REINZ), it forecast that the national average house price would bottom out at 16% below its peak.

REINZ further explained that this did not mean house prices in every region would stop falling at the same time, as the market bottom could differ across New Zealand. Encouragingly, however, current auction clearance rates in Auckland point to a rapid return of the market's former vigour. It even saw some potential for prices to rise. Although transaction volumes and new listings remain low, the market is already showing signs of tightening, with a marked reduction in the stock of properties available for sale.

Economists believe easing LVR restrictions could give the housing market a short-term “shot in the arm”. More importantly, market fundamentals are less weak than before. With net migration reaching a new high in a short period and housebuilding slowing, housing demand now exceeds supply, and the shortfall continues to widen.

Housing demand now exceeds supply, which will have a positive effect on house prices

According to ANZ's latest research, the housing shortage had largely been eliminated by the third quarter of last year, but new demand exceeded supply over the following two quarters. Calculations based on net migration figures show that a housing supply shortfall of around 5500 homes emerged in just those two quarters. Economists said that, with net migration showing no sign of easing, the housing supply shortfall would continue to widen for some time.

Recent Auckland auction clearance rates show the housing market is regaining momentum

ANZ economists expect New Zealand house prices to stop falling and begin rising, with a dramatic turnaround in the short term. They forecast quarterly growth of 1.6% in the final two quarters of this year. Recent Auckland auction clearance rates already indicate renewed momentum in the property market. Although house prices in April were still 22% above pre-pandemic levels, homes have become slightly more “affordable” compared with the peak of the past two years. They predict the next house price peak will occur in December 2025. The economists also said these forecasts could be affected by several external factors, including changes in migration and household incomes, uncertainty surrounding New Zealand's election, and debt-to-income restrictions that the Reserve Bank of New Zealand is highly likely to introduce from early next year. All could have a major impact on the housing market.

So what are conditions in the property market actually like?

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The latest market survey of real estate agents by prominent independent New Zealand economist Tony Alexander found:

Nearly 30% of agents said they were seeing more potential buyers attending open homes despite the arrival of winter, compared with only around 3% of respondents last month. This is the highest reading since February 2021, when 43% of agents reported more potential buyers entering the market.

Around 54% of agents said they were seeing more first-home buyers entering the market, up from 22% last month and just 3% in January. The latest figure is the highest since October 2021.

Alexander's survey concluded that house prices were bottoming out and the market's former buoyancy was returning, driven mainly by first-home buyers.