By Kelvin Davidson
Early this year I was quoted in an article that explored how the country’s housing market might change if the current ‘artificial’ restrictions were taken off. It was a purely hypothetical scenario musing over the removal of the many handbrakes introduced in recent years including the Foreign Buyer Ban and loan-to-value ratio (LVR) rules.
It was certainly an interesting suggestion but one that all of the commentators interviewed, myself included, concluded would result in little to no significant impact in the near term.
What it did do, however, was get me thinking more generally about the LVR restrictions, and what their future might be.
As a quick refresher, LVR restrictions cap how much a bank can lend relative to the purchase price.
The restrictions were taken off in 2020 but put back in place in March 2021 and then tightened further to help dampen the post-COVD buying frenzy and curb any looming financial stability risks. Current LVR levels mean investors mostly require a 40% deposit while owner-occupiers generally need a 20% deposit, although new-builds are exempt.
Nobody I’ve spoken to is realistically entertaining the idea that the Reserve Bank (RBNZ) would remove LVRs altogether anytime soon, but it is possible that they’ll be loosened eventually – perhaps by reducing the deposit rule for investors (e.g. 5% of loans < 30% deposit, rather than the current 40% requirement) and raising the speed limit for owner-occupiers (e.g. 20% of loans < 20% deposit, rather than the current 10% speed limit).
However, to me, some form of LVR loosening doesn’t seem imminent. Here’s why.
- Most importantly, the current housing downturn isn’t triggering major financial stability risks (such as widespread mortgagee sales) – and technically those would have to be apparent before looser lending rules would start to be pondered by the RBNZ. Indeed, in a falling housing market, looser LVRs might actually create their own risks, e.g. greater chance of negative equity if people only require small deposits
- Similarly, looser LVRs at the same time as the RBNZ is trying to cool the economy and inflation with a higher official cash rate seems counter-productive
- There have been suggestions from time to time that LVRs should be removed or relaxed to help more first home buyers (FHBs) get into the market. However, it isn’t the RBNZ’s job to be concerned if LVRs are hampering one buyer group over another. And in any case, the CoreLogic Buyer Classification series continues to show that FHBs’ market share is actually holding up well
- Meanwhile, as noted in the article and hypothetical situation mentioned above, even if LVRs were loosened in the near term, borrowers may not come flooding back (given low consumer confidence at present and higher interest rates), while banks would probably stay pretty cautious too. After all, even with the speed limit for low-deposit owner-occupier lending currently sitting at 10%, the actual figure in November for these loans was 4%
Although I think the probability that LVRs will be loosened this year is low, there’s a reasonable chance we’ll see a shift if/when formal caps on debt-to-income (DTI) ratios are imposed from around March 2024. In other words, giving with one hand and taking with another in early 2024. More detail on DTIs can be seen here, in particular the consultation document.
Again, the RBNZ should be independent from the politics. But to the extent that this shift in the policy mix might help FHBs a bit more (because they find it harder to raise deposits) and hampers investors a little (because they borrow at higher DTIs more often), this would no doubt please the current Government, if they were still in power at the time.
Ultimately though it’s worth reiterating that the cost of finance is the most important factor. Continued high mortgage rates into 2024 would probably restrain housing activity and prices regardless of what was happening to credit policy.