The NZ Reserve Bank dropped the LVR rate in response to NZ’s COVID-caused recession. But in a housing market that is still growing, it’s starting to cause problems.
The NZ Government has a range of measures that it can take to slow or speed up the economy. In May, the Reserve Bank pulled one of the ‘speed up’ triggers for the economy. In the post-COVID recession, the decision was made to remove all restrictions on Loan to Value (LVR) lending. But the outcomes have not been quite what they wanted.
What is the LVR?
The Loan to Value Ratio is a measure of how much a bank lends against a mortgaged property compared to the value of that property. For many years now the standard has been 20:80 (with some exceptions), so you’d need a 20% deposit in order for the lender to be able to offer you a loan worth 80% of the house value.
This tool helps to stop sub-prime mortgages, where the loan amount is higher than the value of the home. It also is used to slow the housing market, as people need to have more money saved before being able to buy a home. In May 2020, when the NZ economy needed a gentle push in a positive direction, all restrictions were removed, and the foot came off the brake for many people.
The outcomes of removing LVR restrictions
Since May, lending to investors has tripled. A record $7.3 billion was loaned to NZ house buyers in October alone. There has also been a 134% increase on mortgage lending to property investors, who are already often highly leveraged.
Removing LVR rates, combined with low interest rates, and a tight housing market, has meant that despite NZ’s recession, house prices are still rising. In a country where housing is already rapidly becoming more unaffordable for the average Kiwi, with an 11% increase in house prices so far this year, and 1.3% in October alone.
Experts were predicting a housing slump of about 5 to 10% due to the pandemic. Instead, prices are continuing to rise with more buyers, more competition, and no lending restrictions.
This has resulted in record average house prices, with Wellington shooting up to $811,099 and Auckland a whopping $1,093,405.
Experts want the LVR reinstated
Leading Kiwi economists are asking for the LVR to be reinstated. At the time the restrictions were lifted, the Reserve Bank stated that it would revise it again sometime before May 2021. The concern is that if the Reserve Bank does nothing until then, house prices are simply going to continue rising and become more unaffordable, more rapidly. It’s fuelling the housing market bubble, which is already outperforming all expectations in the current financial climate.
Because many banks, despite the zero LVR rate, were still preferring 20% deposits for many first-time lenders, much of the lending has been to investors.
Despite many calling for reinstating of the limits, some suspect that the no LVR will continue until at least March 2021, around technical reasons and the mortgage deferral scheme which ends in March.
Will reinstating the LVR slow the housing market?
While reinstating the LVR won’t slow the housing market completely, it should help to put the anchors on a bit. The current situation in NZ is challenging to resolve; the lack of supply of available properties is the result complex mix of:
- Local body government being slow in approving new builds and land zoning changes
- Poor quality house builds historically meaning there is a lot of energy and time going into rebuilding or repairing leaky or cold housing
- Lack of qualified tradespeople and immigration caps stopping skilled people coming in to help with builds
- Christchurch earthquake resulting in a drain on building resources while they rebuilt
So, while the LVR rate helps to slow the market, it doesn’t suddenly result in a lack of demand or more supply of quality homes. Until those large, complex issues around supply are resolved, NZ’s housing market will continue to be tight.
What does an increase in LVR mean for you?
If you were intending to use this time to buy your first home using a 10% deposit, your window of opportunity might be rapidly closing. The Reserve Bank only intended this as a temporary measure to help the ailing economy, so it was always going to be a short-lived option. Banks, while having the go-ahead to offer low deposit loans, are still skittish about doing so, and there is no guarantee the loan at this percentage will be approved anyway.
It’s a mixed bag of outcomes once the LVR restrictions return though—while you will no longer be able to buy a house with a small deposit, the restrictions being reinstated may mean a slowing of the housing market too, which will benefit you in the long run, with lower housing prices and less competition from investors.
If you do want to buy, and only have a 10% deposit, contact Sam Kodi today. He can help you put together a financial budget and understand if you really can afford a house at that rate. If not, he can help you set up your finances to save more, and get you into the house of your dreams in the future—maybe when the Reserve Bank has lifted it to 20% again. Regardless, it will be the best outcome for you and your family.
However, a 10% deposit isn’t always the best of plans anyway, so maybe this is the universe telling you that you need to save more. Email or call Sam to find out if you should act now or keep on saving.