News that the Reserve Bank is planning to drop the LVR restrictions is arguably the most positive thing to happen to the housing market in seven years.
I’ve been campaigning for the removal of these pernicious restrictions since 2014 and have repeatedly described them as the single biggest cause of the housing crisis in New Zealand. Indeed, it’s not an overstatement to assert that the loan-to-value-ratio restrictions, far more than house prices, have been the main reason that many thousands of kiwis haven’t been able to get into their first home.
First introduced, by the Reserve Bank, in 2013, the restrictions constrained banks by setting a minimum deposit on home loan lending which, currently, means that home buyers usually require a minimum deposit of 20 percent of the value of a home and investors need a 30 percent deposit.
At their introduction the Reserve Bank claimed that their purpose was to moderate house price inflation – which is another way of saying that their goal was to cool the market, and perhaps to even bring house prices down. But did they achieve this? Not in the slightest. Between their introduction in 2013, and mid-to-late 2017, Auckland house prices continued to accelerate away – only eventually flattening off at the point of the cycle when they had been predicted to do so by myself and a few other commentators. As for the rest of the country, most regional towns and cities were still experiencing strong house price growth as recently as last month - just as would be expected as part of the market cycle.
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So how did the Reserve Bank respond to this failure? They simply changed their narrative and claimed, instead, that the restrictions were really about market stability and the risk of a crash if house prices got too high.
This sounded comforting, but it was nonsense. The New Zealand property market has actually been remarkably consistent for almost 40 years and needed no help from the Reserve Bank to maintain that stability. The only time we’ve experienced anything even remotely resembling a crash was in 2008, following the GFC, when prices bottomed out 8.6 percent below the market peak, before quickly recovering and taking off again.
Some have argued that it was the role of the Reserve Bank to keep the market safe and that, even if the policy was a sledgehammer to crack a walnut, it was well-intentioned. This view would have more credibility if the LVR restrictions hadn’t done so much damage to the aspirations of first home buyers.
The starkest evidence of this is in Auckland. It’s no coincidence that the city in which house prices are the highest is also the city in which first home buyers had been least active. A 20 percent deposit on an Auckland home – for which the median price is around $800,000 – is $160,000, sum which has simply been out of the question for many people.
Now, finally, this misguided nonsense will end and the decision on the size of the deposit required to buy a home will be between the bank and the home-buyer – just as it always should have been.
But it gets even better. If the common practice prior to the imposition of the LVR restrictions is re-introduced, loan approvals will now be much more focused on the income of the applicants, and their ability to comfortably service a mortgage. This means that we could also see a return to deposits as low as 5 percent where applicants have strong income and a good credit rating – a change which would allow thousands of Kiwis to buy a home where they have previously been closed out of the market.
Don’t expect the banks themselves to move too quickly on this change, however. Their appetite for lower deposit loans will be tempered by understandable caution about what might happen to house values in the wake of the Covid-19 crisis so it may be a few months before we really start to see competition in this space. Also, the banks own systems are now so attuned to the Reserve Bank policy that it may take a while for them to gear up to doing things in a different way.
But change will come – and for many Kiwis, some for the first time in their lives, home ownership will once again be a realistic aspiration.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
