Proposed easing of loan-to-value ratios (LVRs) are tweaks and not likely to bring investors flooding back to the housing market, experts say.
The Reserve Bank announced on Wednesday it was taking consultation on changing the current restrictions of a 10% limit for loans with LVR above 80% for owner-occupiers, and a 5% limit for Loans with LVR above 60% for investors.
The new restrictions would be 15% for loans with LVR above 80% for owner-occupiers and a 5% limit for loans with LVR above 65% for investors.
The Reserve Bank says LVR restrictions promote financial stability by limiting high-risk mortgage lending with the aim of reducing the impact and severity of housing corrections by increasing the resilience of the banking system and households.
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The current LVRs were put in place in November 2021, when risks were elevated but in the past year house prices have fallen without widespread impact to financial stability.
“Our assessment is that the risks to financial stability proposed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency,” says deputy governor Christian Hawkesby.
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CoreLogic’s chief economist Kelvin Davidson says LVRs limit how much mortgage banks are willing to advance against the value of a property, ensuring borrowers put in a sufficient amount of deposit.
For the Reserve Bank, they are about limiting possible damage to the banking sector through big falls in house prices and people’s equity being wiped out, he says.
While the announcement gives a consultation period with changes due on June 1, Davidson believes they are a fait accompli.
“I think it's an acknowledgement that things are pretty tight and there's some people who probably should be able to get a loan who can't.”
They will mean a little more demand in the market than there otherwise would have been, and some investors may come back as well as first-home buyers, Davidson says.
“It sort of adds to a growing list of reasons why house price falls are probably about to come to an end.”
Reserve Bank Governor Adrian Orr in February. Photo / Getty Images
But the changes are small and Davidson says the likely introduction of debt-to-Income ratios in March next year would curb investors more than LVRs.
He expects a DTI ratio of around seven: “If you have $100,000 of income you can borrow $700,000 or have $700,000 of debt.
“If you've already got a mortgage on your own house, for example, it's going to be pretty difficult to stretch to a rental property so I think they are reasonably significant restraint on the market.”
DTIs are the bigger change, he says: “It links house price growth to incomes really and if incomes only grow at 3 or 4% on average over the long run that's probably the rate that house prices will grow.”
Peter Lewis, vice president of the Property Investors Federation, thinks the LVR announcement is a tweaking of a bigger problem.
More important to investor activity, which Lewis says has been very quiet, was the removal of tax deductibility of mortgage interest.
CoreLogic chief economist Kelvin Davidson: “I think it's an acknowledgement that things are pretty tight.” Photo / Peter Meecham
“That effectively makes it impossible for anybody to actually buy a residential investment property because whatever you buy you're going to lose money hand over fist.”
Lewis says investors are waiting to see what happens with the election later this year but says the rental market is headed for trouble.
Some investors are being forced out of the market, with some having to top up mortgage payments by $500 each week.
Others who have good tenants are waiting for them to leave then will sell, and there is attrition of aging landlords, he says.
That is all concerning, “but what we're actually doing is making it impossible for new entrants to come into the property investment market so we will see over time a reduction in the number of rentals available.
“I think the bad effects will come out in the years to come and this is going to lead to big problems in the rental market say in the next 10 years unless something is actually done about it.”
Infometrics’ chief executive Brad Olsen: “The changes might well help to stabilise the housing market sooner by bringing in a few more buyers.” Photo / Tania White
Brad Olsen, Infometrics’ chief executive and principal economist, also describes the LVR move as tweaking, although not in a bad way.
“This probably widens the pool slightly but it shouldn't unleash a rush of housing market activity, it just sort of might move it from freezing to cold.”
“In our view the changes might well help to stabilise the housing market sooner by bringing in a few more buyers.
“I guess the reason we don't think it's a massive shift is that you've still got what are relatively high house prices (and) mortgage rates are also high.
“All of that is still going to be a challenge for a lot of potential buyers to get over the line for.”
Chris Farhi, Bayleys head of insights, says the LVR changes make sense but while they are a positive for the market they are not overly significant.
“The tweaks they’re proposing are relatively minor in the overall scheme of things.”
Serviceability issues around interest rates and mortgage payments are more likely to be the bigger constraining factor for a lot of people at the moment, he says.
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