Reserve Banks to end home loan restrictions

The Reserve Bank of New Zealand is proposing to remove loan-to-valuation restrictions on mortgage lending as Covid-19 wreaks havoc on the economy.

"This move will help banks to keep lending to support customers, including with mortgage deferral," the central bank said.

The LVRs, which went through several adjustments, were first introduced in October 2013 to curb an overheated housing market.

There are currently two loan-to-value restrictions in place: banks can only lend 20 per cent of their residential mortgage book to owner-occupiers who don't have at least a 20 per cent deposit and they can only lend 5 per cent to investors who don't have a 30 per cent deposit.

Stephen Toplis, head of research for BNZ Bank, said New Zealand house prices are in for a 10 per cent hit over the remainder of the year due to Covid-19.

"The single biggest determinant of whether people purchase a house is what they earn. In turn, this is most affected by whether or not they have a job," he said. Toplis is expecting the unemployment rate to hit 8 per cent by the end of the third quarter.

"The weakening labour market will be the biggest driver, but we also see reduced demand due to lower-than-expected population growth, and increased supply, as properties that were previously rented out to tourists come to market," he said.

The proposal is in response to the economic downturn caused by the Covid-19 pandemic.

The LVR requirements are one of the macro-prudential tools that the Reserve Bank has available to respond to cyclical pressures, said RBNZ deputy governor Geoff Bascand.

Not only that, but, if the restrictions are removed, the RBNZ will monitor activity and feedback from the retail banks for 12 months. After that period, it will review whether to reinstate the restrictions.

"This provides banks and customers certainty that no further changes to LVR requirements will be made for at least one year," it said.

Economics commentator Tony Alexander told OneRoof that scrapping the LVR increased the potential of new buyers entering the market earlier than planned. It also put first home buyers in better position.

"There are many first home buyers that have good secure jobs but just lost some of their KiwiSaver. Well now, the impact of that has been completely offset by the banks saying they'll accept less than a 20 per cent deposit."

OneRoof property commentator Ashley Church, a vocal critic of the LVR requirements, said they had been the biggest hurdle to home-ownership in New Zealand since their introduction.In a column for OneRoof last month, he wrote: "The legacy of the restrictions is the extraordinary damage they’ve done to the housing market – particularly to young first home buyers. The LVR requirement to have, in most cases, a 20 percent deposit means that tens of thousands of first home buyers were closed out of the market, particularly in Auckland, where a typical deposit of more than $150,000 is required."

Bindi Norwell, chief executive of the Real Estate Institute of New Zealand, said: “Since LVRs were introduced in 2013, first time buyers have found it extremely difficult to save a 20 percent deposit – especially as house prices have continued to rise significantly over the last 7 years. Many first time buyers report having to save for years in order to reach that threshold, and when you’re talking about places such as Auckland, it can take in excess of 15 years for a couple on an average salary to save a 20 percent deposit.

“First time buyers have found themselves in a really difficult situation during Covid-19 with the portion of their KiwiSaver fund able to be used for a first home purchase being at a much lower value than many had expected. The proposal by the Reserve Bank to remove LVRs, albeit for a limited period of time, will go a long way towards helping first time buyers to get onto the market."

She added: “It is interesting to note that the Reserve Bank’s proposal doesn’t appear to make any distinction between first time buyers, owner occupiers or investors. This is welcome news as Covid-19 is negatively impacting so many people from a financial perspective around the country."

First Home Buyers Club director Lesley Harris says removing LVR removes a big obstacle for those wanting to buy their first home.

"We think it's fantastic news. Banks will still be very careful about how much they want to land people but it takes away the barrier of saving up the 20 per cent deposit. Deposit is often a factor to why people can't get into their first home as they don't have those savings."

The LVR cancellation would also "soften the blow" on the KiwiSaver loss and fill up that gap and more, Harrison says.