As has long been forecasted, the Reserve Bank of New Zealand (RBNZ) has now moved to reinstate higher Loan to Value ratios (LVRs). There were no restrictions last year, meaning buyers could potentially purchase a home while putting down a smaller down payment. However, the property market has since boomed, prompting the RBNZ to consult interested parties on whether to reinstate the LVRs.
The government seems to have been the only party surprised with the housing market’s vigorous rebound over the past year. Now, the government is predictably encouraging the RBNZ to try and slow down the rally in property prices. In this blog post, we’ll review why the LVR restrictions have been reinstated, what the predicted results are, and how this will impact commercial and residential development finance.
Prompted by the government and the expanding house price bubble, this move to reinstate LVR restrictions is expected to slow the surge in house prices, but not until the second half of 2021. The RBNZ has announced that it will be cracking down on bank lending to residential property investors and will reinstate the tougher LVR restrictions that were in place last year. From May 1, at least 95% of new bank lending to residential property investors will have to go to borrowers with deposits of at least 40%. Essentially, the RBNZ is targeting residential property investors with new, higher LVR restrictions. Generally, most commercial investors will once again need 40% deposits, while most owner-occupiers will need 20% deposits.
As an interim measure, from March 1 to April 30, this deposit requirement will be set at 30%. The RBNZ says it is taking a “staged approach” to enable banks to manage their pipelines of loan applications that have been approved, but not yet settled. However, it expects lenders (both banks and non-bank lenders) to respect the 40% rule “immediately with all new loan approvals”.
As for owner-occupiers, from March 1, at least 80% of new bank lending will need to go to borrowers with deposits of at least 20% – the level LVRs were at before removal last year.
In a press release from the NZ Property Investors Federation, executive officer Sharon Culwick was quoted, claiming that the move would inevitably slow down the housing market, making it harder for first home buyers and investors to enter the market. “’The larger deposits required may not stop those people who are looking for an investment option, which is an alternative to the extremely low term deposit rates offered by the banks,’ said Culwick.”
She noted that during the last year, there had been a significant increase of new investors entering the market. And that those investors had purchased on the proviso that house prices would continue to rise at the same levels recently seen.
“Capital gains, however, should only be considered a bonus and not be relied upon,” she said, adding: “In any case, these Reserve Bank restrictions may not make a significant difference to some property investors who have already been hindered by the banks’ internal Debt-To-Income and serviceability rules over the last two years. These restrictions are an internal process that safeguards the financial stability of banks.”
RBNZ Deputy Governor Geoff Bascand says LVR restrictions were removed last year “to ensure they didn’t interfere with COVID-19 policy responses aimed at promoting cash flow and confidence.
“Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace,” Bascand said. “We are now concerned about the risk a sharp correction in the housing market poses for financial stability. …A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt.”
The Reserve Bank has warned that the overheated housing market is at growing risk of a correction necessitating the changes. However, The NZPIF does not believe the new regulations will have any impact on the housing crisis, which is largely driven by lack of supply. “If anything, housing stock for rent will be gradually reduced as property investors are prevented from entering the market. This will put more pressure on those groups who are already struggling to find a place to live,” said Culwick.
Therefore, property investors and owner-occupiers alike need to have the right tools and expertise at hand to navigate these reinstated conditions. For investors in particular, the expert team at ASAP Finance can help.
Beyond the see-saw of LVR restrictions imposed by the RBNZ, supply demand considerations remain a key focus at ASAP Finance. We continue to work hard to ensure adequate funding is made available to our clients for residential developments. It is here that we know we can make the most difference, by doing our part to ensure the successful delivery of new housing stock to the New Zealand property market.