To LVR or not to LVR?

Are New Zealand’s tough lending restrictions still necessary four years later?

National Residential Manager and National Auction Manager Daniel Coulson.

And just like New Zealand has a new Government; a Labour-New Zealand First coalition. While much of its policy remains ambiguous, Reserve Bank of New Zealand’s (RBNZ) reforms have been put on the table by both Labour and New Zealand First.

What the details are, no one knows yet, but calls to relax the RBNZ's lending restrictions have gained momentum and in light of current sales volumes, we ask whether it’s time that loan-to-value (LVR) restrictions were reviewed.

ORIGINALLY ACTIONED FOUR YEARS AGO

Intended as a temporary measure to curb investor activity, the RBNZ's LVR restrictions have been in place now for more than four years. Around August 2013, the RBNZ first announced a 10 percent ‘speed limit’, to restrict the amount of residential mortgage lending at LVR’s of more than 80 percent. Designed to relieve inflationary pressure and guard against a sudden drop in house prices, the incentive facilitated a short period of hesitation from the investment market before activity rebounded again after six months.

Two years later in October 2015 following the fervent growth of Auckland’s residential housing sector, the RBNZ sought to strengthen its lending regulations in New Zealand’s biggest city further. Residential investors were required to have a deposit of at least 30 percent while lending rules were relaxed elsewhere across the country. Deemed largely unsuccessful, these changes shifted ‘Auckland’s housing boom’ to ‘New Zealand’s housing boom’.

The last and most significant tweak to these rules was formally actioned in October 2016, requiring investors to have a 40 percent deposit in order to purchase residential property nationwide. Finally securing the result which the RBNZ was hoping for, these regulations have had a significant effect on the local housing landscape, with investor-activity still comparatively low 12-months later.

LVR’S THE TOP CONCERN BUT INVESTORS STILL ACTIVE

In the recently released ‘ANZ Property Investment Survey’ which measured online responses from some 784 investors in residential property nationwide, 47 percent of the respondents claimed that LVR’s prevailed as their biggest regulatory concern. Despite stating that the most recent regulatory changes had ‘severely impacted’ their investment strategy over the last 12-months, 70 percent of those surveyed said that they would indeed invest in residential property again.

Illustrating continued confidence in the sector, the data also showed that 61 percent of those Auckland-based respondents said that they would purchase again within the next two years – showing that perhaps these latest LVR restrictions have not necessarily put the boot into investor activity as some critics may have thought.

CREATING OPPORTUNITIES

In August this year a number of high-profile stake-holders including Real Estate Institute of New Zealand (REINZ) chief executive Bindi Norwell, then-Prime Minister Bill English and now-Prime Minister Jacinda Ardern weighed into the debate, asking whether its time for the RBNZ to relax lending restrictions which had seen first-home buyers scrape together a deposit of at least 20 percent before being eligible to take their first step onto the property ladder.

In a cause-and-effect type scenario however, recent data released from Kiwibank has shown that in the year to July 2016, the bank’s share of lending to first home buyers has actually increased from 11 percent to 14 percent, as pressure across the housing market – thought to have been applied by investor activity has waned, creating greater opportunities for those purchasing their first property.

VARIABLES AT PLAY

While many have been all-too-eager to pin slowing sales activity squarely on the RBNZ and its macro-prudential tools, it is vital that we acknowledge the wider economic factors at play here.

New Zealand’s leading financial institutions have moved toward greater conservatism amidst global uncertainty and tightening credit conditions, this has filtered down the food-chain and the result has been that fewer residential developments are meeting the requirements for finance. With less homes being built, the council continue to fall short of their housing target. This has exacerbated Auckland’s housing shortage and with such pressure on housing across the region, sellers are hesitant to trade their current residence for fear of not finding another.

Despite this cycle, the ‘Kiwibuild’ initiative by a Labour-led Government looks like it will gain traction, adding another 100,000 homes to the market – half of these in Auckland. This may alleviate some of the demand pressures, and suggests less need for financial mechanisms like LVR’s in its entirety.

THE RESERVE BANK HOLDS ITS STANCE

Motivated in their approach that the LVR restrictions are now just as integral as ever to improve New Zealand’s financial stability and resilience, the RBNZ has fired back at calls to drop LVR restrictions, stressing their temporary nature and standing firm on the stance that the domestic property market is not clear of housing pressures.

With a capital gains tax (CGT) off the table until at least 2021 and deputy Prime Minister Winston Peters focused on slowing migration and foreign ownership of New Zealand property, we expect to see a short sharp increase of activity before the year-end as sellers look to leverage off the relative certainty current economic policy offers.

Despite Peters’ being very vocal about his desire to reform the Reserve Bank Act, giving it greater power in relation to forecasting and currency intervention, both he and Prime Minister Jacinda Ardern have indicated that LVR restrictions will remain the domain of the RBNZ for the forseeable future.

A JOB WELL DONE?

With a proportion of first home buyers re-entering the market and investor-activity flattening, it appears that the LVR restrictions have by-in-large achieved their short-term goal of reigning in the rampant growth of a runaway housing market.

Despite this, the RBNZ’s ultimate intention, which is to mitigate risks to the New Zealand economy prevails, with housing pressures lurking just beneath the surface warranting support for continued use of these regulations – at least for the foreseeable future.

However, changes are likely to occur as a result of the new Government that will rebalance the demand/supply equation nationally. Now more than ever, the time has come to reassess the mechanisms and extent of LVR controls. While this is not likely to occur in the short-term, it should be a medium-term goal for current and future policy-makers before irreversible damage is caused to Kiwi’s net wealth.

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