The LVR Restrictions are Back!
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Articles by Kris Pedersen.
Back in May I wrote that the Reserve Bank had removed the loan-to-value restrictions, which they stated would be for a 12-month period. At the time, this made sense with Government, Treasury and most economists' predictions being in line with double digit decreases in house prices due to the Covid pandemic.
The expectation was that the removal of the restrictions would add some sorely needed confidence to the property market, and hopefully alleviate some of the previously mentioned decreases.
Instead what happened is the hot property market we had when we went into lockdown took off further once we came out, fuelled by even lower interest rates. With the LVR restrictions off, investors who had been limited in recent years started piling back in.
It is worth saying that while the banks were able to relax a lot more in the first home buyer space, they actually decided not to, and we found the market for those with less than a 20% deposit much the same as it was pre-lockdown.
Over recent weeks there has been increased clamouring throughout the media about how hot the market is. This has resulted in greater FOMO (fear of missing out), which has simply served to increase the activity in the market.
As a result, the Reserve Bank announced on 11 November 2021 that they will look to bring LVR restrictions back early, on March 1, 2021.
What will the restrictions be?
We will have to wait until 25 November when the Reserve Bank releases its Financial Stability Report to see exactly what restrictions it intends on implementing. However, I personally expect to see a return to a 30% deposit restriction for investment properties, with the standard exemption for new builds.
The first home buyer area may not be restricted at all. As I wrote above, the banks have not relaxed too much in this space and are showing prudence. It comes down to whether it is decided to just put the previous restrictions back on for the sake of it, or focus on restricting investors, which is also more politically palatable.
Will this stop the runaway property market?
Very unlikely.
At this stage, many investors have enough equity, even with further deposit restrictions. The Reserve Bank has also stated other intentions, such as their ‘funding for lending’ program and the possibility of a negative OCR (Official Cash Rate), which in both cases are designed to push mortgage rates even lower. If they follow through with both of these in the New Year, expect to see an even hotter market in 2021.
On top of this, they aren’t actually wanting to “stop” the property market, but merely slow it down. Increasing prices cause confidence, which results in us spending money and propping up the industries that have been most affected by Covid-19, such as tourism, hospitality, and retail. The confidence around the property market in its own way has helped to keep unemployment a lot lower than what was being predicted earlier this year.
Have I missed the bus?
Potentially. At the time of writing ASB, ANZ and Sovereign have already made formal communications about their intentions to go back to 30% deposit criteria for investments well ahead of time. For ASB and Sovereign, this is immediate. For ANZ this is happening from 7 December 2020.
It is worth noting banks like Westpac and TSB never actually relaxed their LVR criteria. As for BNZ and Kiwibank, neither has released any communication as yet, so there may still be a chance to access lower deposit investment funding before the changes officially take effect in March 2021.
If you are wondering whether there is any benefit to higher LVRs, have another read over this blog or feel free to touch base here.
Kris Pedersen
Managing Director at Kris Pedersen Mortgages
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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