Lack of clarity around new LVRs

NZPIF executive officer Andrew King

As of this week, Auckland investors need a deposit of at least 30% - as opposed to 20% - in order to get a bank loan to buy a rental property.

But at the same time banks are now allowed to lend 15% of their new loans to borrowers with less than 20% equity, outside Auckland. That includes investors and is up from 10% previously.

The Reserve Bank first announced the change to the LVR restrictions, which are meant to curb Auckland’s runaway housing market,  in May. 

Since then there has been much discussion about the impending changes and their potential impact on the market and investor activity.

Despite this, a Westpac NZ online survey released last week indicated that some investors may not be fully aware of the LVR restrictions and what they might mean.

The survey showed that of current property investors who are looking to buy again in the next 12 months, 17% had not heard anything about the changes and 50% had heard about them but knew no details.

Of aspiring investors who are looking to buy an investment property in the next 12 months, more than 21% had heard nothing about the new LVRs and 61% had heard something but knew no details.

NZ Property Investors Federation executive officer Andrew King said this indicated that a large proportion of investors did not have much information and it should be a wake-up call for many.

He said investors should be aware that while they need a 30% deposit to buy an Auckland rental property, they can use existing equity in their own home or another rental property to achieve this.

“On the positive side, it is also now easier to borrow money for rental property outside Auckland.

“So investors may want to consider researching other markets to see if there are opportunities for them in other parts of New Zealand.”

King believes the LVR restrictions might not have the large effect on investors – particularly seasoned investors who are likely to have higher equity levels - that many people think they will.

Kris Pedersen, from Kris Pedersen Mortgages, said he has found that most investors are well-educated about the changes.

“Investors who are building up portfolios tend to be pretty strategic. They want to know the rules of the game before they engage in it.

“For this reason, they are likely to have already wondered about potential catches and thought them through.”

However, there is still a lack of clarity about how the banks will address the LVR restrictions, he said.

“There is quite a bit of grey in the equation. Different banks – and sometimes different divisions of the same bank - tend to interpret the restrictions slightly differently.”

For example, different banks might have different views on how equity can be spread-out between an investor’s own home and their rental properties, even if an investor has the respective loans with different banks.

Pedersen said it will probably take about six months before it is possible to see what sort of impact the restrictions might have actually had on the Auckland market.

“They probably will push investors out of Auckland and into the regions a bit more and the market might drop off a bit.

“But, given ongoing low interest rates, strong migration and the fact the undersupply is still being addressed, I suspect it will pick up again in the first quarter of 2016.”

Recent strong price rises in Auckland also mean that a lot of investors have effectively gained the extra 10% they need for a deposit via increased equity in their existing properties anyway, Pedersen added.

“This means that, while some people might be cut out of the market, there are still a lot of investors out there buying.”