Will LVR restrictions be loosened this year?

CoreLogic economist provides his forecast

Will LVR restrictions be loosened this year?

A chief property economist has shared his views on the future of what New Zealand LVR restrictions could look like for property purchasers this year.

CoreLogic NZ’s Kelvin Davidson (pictured above) said earlier this year, he was quoted in an article that explored how the nation’s housing market might change if the current “artificial” restrictions were taken off.

“It was a purely hypothetical scenario musing over the removal of the many handbrakes introduced in recent years including the Foreign Buyer Ban and LVR (loan to value ratio) rules,” Davidson said.

“It was certainly an interesting suggestion but one that all of the commentators interviewed, myself included, said would result in little to no significant impact in the near term. What it did do, however, was get me thinking more generally about the LVR restrictions and what their future might be.”

LVR restrictions won’t continue forever

Davidson said LVR restrictions were removed in 2020, but they were reinstalled in March 2021 and then tightened further to help dampen the post-pandemic buying frenzy and curb any looming financial stability risks.

“Current LVR levels mean investors mostly require a 40% deposit while owner-occupiers generally need a 20% deposit, although new-builds are exempt,” he said.

“Nobody I’ve spoken to is realistically entertaining the idea that the Reserve Bank of New Zealand (RBNZ) would remove LVRs altogether any time soon, but it is possible that they’ll be loosened eventually – perhaps by reducing the deposit rule for investors (e.g. 5% of loans < 30% deposit, rather than the current 40% requirement) and raising the speed limit for owner-occupiers (e.g. 20% of loans < 20% deposit, rather than the current 10% speed limit).”

Market conditions not conducive to freeing up LVR rules

Davidson said some form of LVR loosening does not seem imminent.

“Most importantly, the current housing downturn isn’t triggering major financial stability risks (such as widespread mortgagee sales) and technically those would have to be apparent before looser lending rules would start to be pondered by the RBNZ,” he said.

“In a falling housing market, looser LVRs might actually create their own risks, eg greater chance of negative equity if people only require small deposits. Similarly, looser LVRs at the same time as the RBNZ is trying to cool the economy and inflation with a higher official cash rate seems counter-productive.”

Even if LVRs were relaxed, it might not have desired effect

Davidson said there had been suggestions from time to time that LVRs should be removed or relaxed to help more first home buyers get into the market.

“However, it isn’t the RBNZ’s job to be concerned if LVRs are hampering one buyer group over another,” he said.

“Meanwhile, even if LVRs were loosened in the near term, borrowers may not come flooding back (given low consumer confidence at present and higher interest rates), while banks would probably stay pretty cautious too. After all, even with the speed limit for low-deposit owner-occupier lending currently sitting at 10%, the actual figure in November for these loans was 4%.”

Davidson said there is a reasonable chance a shift in LVRs could occur when formal caps on debt-to-income ratios (DTIs) are imposed from March 2023. He said more details on this DTI change, including the RBNZ’s consultation framework, are available here

He said the RBNZ should be independent from the politics.

“But to the extent that this shift in the policy mix might help first home buyers a bit more (because they find it harder to raise deposits) and hampers investors a little (because they borrow at higher DTIs more often), this would no doubt please the current government if they were still in power at the time,” he said.

“Ultimately though, it’s worth reiterating that the cost of finance is the most important factor. Continued high mortgage rates into 2024 would probably restrain housing activity and prices regardless of what was happening to credit policy.”

In a recent survey, independent economist Tony Alexander interviewed mortgage advisers across New Zealand, with many saying tightening LVRs and rising interest rates were hurting buyers.

“Our advisers told us with test rates increasing, LVR restrictions are still the killer,” Alexander said.

“If clients do not meet first home loan criteria, it’s very difficult to get funding. There are willing participants, but the limitations on low deposit funding as well as aggressive affordability tests are hamstringing many potential borrowers.”

Non-bank lender Liberty specialises in creating custom home loans for borrowers who might not be serviced by traditional lenders. Liberty Financial CEO Aaron Skilton said particularly in uncertain times, mortgage advisers and their customers needed more flexibility and choice.

“We do not face the LVR restrictions that banks do, so this means that Liberty can better service broader segments of customers that the banks are unable to,” Skilton said. “The flexibility and free-thinking nature of Liberty products is a primary advantage in an ever-changing market.” 

What are your views on LVR restrictions for prospective home buyers? Let us know in the comment section below.