LVR restrictions will dampen Auckland market

CoreLogic data shows that, since October 2013, there has been an increase in purchases by smaller investors (two to four properties) – particularly in Auckland.

This suggests that smaller investors have been leveraging up in pursuit of capital gains, the Reserve Bank analysis states.

“Given that the LVR policy is likely to be more binding within this relatively overrepresented group, the incoming changes to the LVR restrictions might be expected to have a significant dampening effect on Auckland housing market activity and house price inflation.”

The Reserve Bank analysis provides a detailed overview of recent trends and market conditions.

It finds that the increased housing market activity of recent months has been driven by strong investor demand, both within and outside of Auckland.

This is reflected in increased investor purchases and significant growth in investor-related mortgage credit.

“Investors are disproportionately represented at both ends of the price spectrum, contrary to popular opinion that investors predominantly buy relatively cheap properties for use as rentals,” it states.

Much of the increase in investor purchase shares coincided with a fall in the share of movers – although the analysis notes the categories could be fluid.

The analysis also finds no evidence of an increase in cash buyers in response to LVR policies.

Rather, cash buyer shares are falling in Auckland and remain flat around the rest of New Zealand.

This could indicate that decreasing affordability in Auckland has reduced the ability of potential buyers to fund their house purchases out of equity, the analysis states.

However, the largest decline in cash buyers was among those with relatively large portfolios who should have benefitted most from price growth.

“This suggests there are other factors at play over and above decreasing affordability.

“For example, this pattern would be expected if multiple property owners were becoming increasingly levered on the expectation that prices will continue to rise rapidly going forward.”

However, the analysis emphasises that the RBNZ’s new LVR restrictions should have a significant impact on credit-dependent Auckland investors.

The LVR rules, which are due to come into force on November 1, will impose a 30% deposit on investor mortgage loans in Auckland.