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Blanket LVRs Change Climate

Jeremy Stapleton outlines the Reserve Bank’s new proposal for 60% LVRs for investors across New Zealand.

By: Jeremy Stapleton

31 July 2016

Property investors could be forgiven for feeling a bit unloved with both the Government and the Reserve Bank of New Zealand continuing to look at the role of investors in the housing market.

Prior to the Reserve Bank’s July 7 speech on housing market risks to financial stability, Prime Minister John Key went on public record urging the central bank to consider the role of property investors.

What Mr. Key had in mind was the Reserve Bank’s loan-to-valuation (LVR) restrictions, which presently require a higher LVR for mortgage lending on investment property in Auckland (30% minimum equity) than for the rest of New Zealand (20% minimum).

In the July speech, Housing risks require a broad policy response, Reserve Bank deputy governor Grant Spencer stated, “The Reserve Bank is mandated to promote the soundness and efficiency of the financial system.”

“Our concern is that a severe housing correction would pose real risks for financial system stability and the broader economy.”

Mr. Spencer had to concede that low interest rates were partly responsible for the property boom, and of course the Reserve Bank effectively sets short term rates.

A cluster of reasons was blamed for housing inflation beyond the central bank’s comfort zone.

“On the demand side, the key drivers are population growth and easy credit,” stated Mr. Spencer.

“The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income.”

“Residential investors are accounting for an increasing share of house sales and new mortgage credit.”

The Reserve Bank subsequently responded to cheaper credit and Mr. Key’s prompting about property investors by issuing a consultation paper on July 19 proposing changes to LVRs effective from September 1, hinting that banks should start complying before then.

Under the proposed new rules, the following restrictions would apply:

  1. Lending to residential property investors across New Zealand would be permitted with an LVR of 60 percent (i.e. a deposit of 40 percent).
  2. No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
  3. Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

These rules abolish the previous LVR differences between Auckland and the rest of the country.

The rules also preserve the distinction between existing properties, to which LVR restrictions apply, and new dwellings, which are exempt.

Property investors who are highly geared may see their options narrowed under the new LVR restrictions.

By contrast, investors who are well-established with substantial equity may not notice much difference in the way they operate.

The Reserve Bank has also signaled that it is reviewing bank capital in relation to investor lending and it is possible that this will increase the costs of funding investor lending.

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