No end in sight for LVRs

BNZ chief economist Tony Alexander

In his latest weekly update, BNZ chief economist Tony Alexander said the Reserve Bank made it clear in their MPS last week that they still see a risk the current market pause could be temporary.

Annual house price inflation has slowed nationwide to 5% while Auckland has slowed to 2% but, since 2013, the annual pace of growth in lending for housing purposes has gone up to 7.7%, he said.

“It is difficult to believe that the Reserve Bank feels there is yet sufficient restraint in the growth of housing lending.

“Last week’s statement shows they are not yet convinced of ‘better balance in the housing market’.”

That means that the Reserve Bank is highly unlikely to lift the LVRs, particularly for investors, in the near future.

Alexander said that instead the next 12 months will bring pain for late-cycle investors hit by the 40% minimum deposit requirement and tighter bank lending rules.

“A lot of investors have over-extended themselves in the past three years and their hopes of new investors taking property off their hands at a tidy profit have been dashed.

“The next layer of the investor pyramid has been stripped away by the need to raise a 40% deposit and banks steadily tightening debt servicing criteria.”

Further, in Auckland, there is now an over-supply of properties which can be intensified because neither the finance nor the builders are there for development.

Alexander said that means lots of investors are now sitting on potentially highly geared up properties they cannot get anyone to buy and develop.

“They are nervous and getting worried that any profit on paper they may have achieved the past year or two could be disappearing fast. They are starting to get stressed.

“The FOMO which drove them to gear up and buy any old piece of property last year and before is now working in the opposite direction.”

In his view, this means many investors will be looking to offload properties more cheaply and so the market has turned in favour of first home buyers – who he doesn’t believe are being held back by the LVRs.

This runs counter to recent calls from REINZ, various real estate agents and even the Prime Minister to lift the LVRs for first home buyers.

Alexander said the last thing first home buyers need is for extra demand to be thrown in to the market thanks to LVR reductions.

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