RBNZ Rules – Keep Calm and Carry On

This week the Reserve Bank announced new loan-to-value ratio (LVR) restrictions, which have been probable and imminent for some time.

Under the new regulations from October 1 most buyers will need a deposit of 20% or more, rather than the 10% previously required.   This is because only 10% of a bank’s new lending can be to clients with less than a 20% deposit. While some economists say the new controls will have a negative impact on house buyers, this isn’t necessarily true for investors, particularly as it will reduce the level of competition for properties.
So the message is, keep calm and carry on.

The move is an effort to create more financial stability, take some heat out of the rising housing market and keep interest rates low. Last month, the national median house price was $385,000 according to Real Estate Institute of New Zealand figures. For the Auckland region it was $552,000. Nationwide house prices have surpassed the previous market peak of 2007, with Auckland and Christchurch leading the charge.

Latest QV data shows Auckland values are 12.6 percent higher than last year and are increasing at a faster rate than before the previous peak. In Christchurch there has been a 10.4% increase in values in the past year, according to QV figures. And while the number of properties for sale has stayed low, demand remains strong.

Some economists say the new controls on mortgage lending will shut more New Zealanders out of the market, particularly first home buyers. HSBC economists Paul Bloxham and Adam Richardson told the New Zealand Herald the policy was likely to have only a minor effect on house prices. “A combination of low interest rates, rising inward migration and supply-side constraints are likely to see house price inflation remain elevated for some time.”

Westpac chief economist Dominick Stephens told the newspaper the restrictions would cause a lower rate of home ownership. However, the changes could work in the favour of  investors by reducing competition from low deposit borrowers, said Michael DeCourcy (Property Apprentice Coach). “My view is that it will not impact the investment market greatly since a large number of investors can access a deposit of 20%,

For those borrowing more than 80%, he advised getting finance pre-approved as soon as possible as this will be honoured by the bank. Financial advisor Tracey Munns agreed, and said a large proportion of her clients are 80% or less borrowers anyway. For those borrowers above 80%, there are other ways for them to borrow and purchase, she said.
“It will be either via, gifted deposits or joint ventures, and don’t forget there are other lenders who are not banks that will enter the space of above 80% lending.”