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LVR Restrictions: The Reserve Bank Takes Action

Thursday, September 05, 2013

The incessant hum of LVR restrictions and other macro-prudential tools to curtail the seemingly out-of-control Auckland housing market by the Wheeler led RBNZ is crescendoing into a full-blown chorus set to underscore lending ethos in the low equity market.

From 1st October onwards, banks are required to have no more than 10% of mortgage lending flows at LVRs of more than 80%.  Translation - if you have less than 20% deposit to put down for a house then chances are, more people are going to start saying no to you.  The rationale?  To slow the Auckland market tempo by excluding those who are or expect to be highly-leveraged.  

It is worth noting at this point that the Reserve Bank is imposing a speed limit, not a roadblock.  Banks are not being stopped from doing business with high LVR borrowers.  They are simply being asked to exercise prudence and foresight in a market that is increasingly being fuelled by debt.  

Information pertaining to the application and the monitoring of the new speed limit is still sketchy.  Frequent reminders for borrowers to 'check with [their] bank[s]' litter the latest RBNZ published guide for borrowers.  Apart from an indication that it is looking to harmonise the disparate rules of calculating loan value (as purely mortgage or inclusive of personal credit cards and other loans), the Reserve Bank's language thus far suggest that while it expects decision makers of the financial market to 'operate within the spirit of the new regime', it is not yet prepared to intervene on a day-to-day operational level.  Perhaps the cautionary tale of unintended consequences is calling for Mr Wheeler and his team of policy makers to define the new regime only globally and leave it to individual banks to finesse the nitty-gritty.

What does this all mean for property investors and (first) home buyers? 

For Property Investors 

As long as you are not highly geared, no move has yet been made to hold back your spending.  If the market is to cool as Mr Wheeler plans, then prices will hit a flat note in favour of buyers.  

As more low equity buyers (and highly-geared investors) are blocked out of the market, logic would suggest a natural increase in tenant pool which can only drive rental prices up.  Perhaps this is a good time for me to urge all landlords to start looking at rental assessments with the view to increase your current rent to what is the fair market value.  

For First Home Buyers (specifically, low equity buyers)

Not all is lost.  If your financial history sits you at the lower end of your bank's credit risk bracket, you may still be part of that 10% that can secure a high LVR loan.  Be aware that the days of which borrowers can negotiate out of a low equity premium (often in the thousands) are severely numbered.  You are likely to have to wear that on the chin and take solace in knowing that the capital gain you stand to reap in this market is accelerating faster than what you are likely to be able to save in the time needed for you to get your 20% deposit.  

Property old-timers who have been through the cycle a few times appear to take this new measure with a grain of salt.  They had seen the market play out in similar fashion during the 60s, 70s, and 80s.  Investor and commentator, Olly Newland even wrote a play-by-play for the emergence of a second-tier finance industry.  

That said, no amount of fancy funding tricks will ever beat the first rule of thumb for first home buyers: adjust your expectations and be a smarter, more industrious buyer.  

For the Auckland Housing Market

Prominent views from the property industry dismiss Mr Wheeler's initiative as toothless and providing no real solution to the supply crisis in Auckland.  Make no mistake, restricting high LVR lending will not all of a sudden build 30K houses nor will it stop plane-loads of immigrants arriving into Auckland.  Mr Wheeler's purview relates to the stability of our economy not the resolution of a media labelled housing crisis.  The complexity of the Auckland housing supply shortage can not be unravelled by one single banking measure.  In an environment where residential development is restrictive, foreign buyers are not dis-incentivised and Kiwis continue our unfettered love affair with brick and mortar, mitigating the current market without some much needed shift in policy and culture will be close to impossible.  At least Mr Wheeler has set the precedent of making a move towards change.  

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