Experts have welcomed plans to drop the loan-to-value-ratio restrictions, calling the home deposit rules a speed-bump New Zealand’s economy could do without.
The Reserve Bank announced this week it was proposing to suspend the LVR restrictions on mortgage lending to counter the damaging effects of the corornavirus.
Nick Tuffley, chief economist at ASB, says the Reserve’s decision was fuelled by concern for banks’ balance sheets.
“The reasons for putting the LVRs in place are no longer relevant. We don’t need measures that constrain housing credit from growing,” he says.
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The LVRs, which went through several adjustments, were first introduced in October 2013 to curb an overheated housing market.
There are currently two LVR 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.
Tuffley says the Reserve will make a final decision on the proposal after assessing feedback and if the change gets the green light, New Zealand banks will quickly adopt it. He also expects the LVRs to be lifted for at least 12 months.
“It’ll be much easier to move to an environment which does not have restrictions than one that has them, because [when the LVRs were first introduced] the demand for loans was far greater than banks’ ability to give them out without exceeding the limit.”
Squirrel managing director John Bolton says Reserve’s decision gives banks more flexibility if house prices drop.
“House prices are at risk of dropping, which means the LVRs in existing houses will go up. If banks are able to approve loan deferrals and top-ups to help out clients there’s a risk they’ll be taking more than 80 per cent loan to value ratios.”
It’ll help banks respond to their existing clients who are in “a bit of a pickle”, he says.
“A lot of business owners borrow on their house so a lot of the capital that flows into small businesses in New Zealand is via residential landing,” he says.
The LVR was a speedbump in the lending world, which, when removed, is going to encourage people to get into the property market, Bolton says. However, their removal isn’t deigned to help first home buyers and banks won’t be changing their own lending criteria.
The biggest issue for banks will be income stability, Bolton says.
“Banks are still quite conservative. They are nervous that people will lose their jobs and struggle to service the debt and that’s where they see the exposure,” he says.
Gareth Kiernan, chief forecaster at economic analysts Infometrics, agrees banks will be more risk-averse despite the lifting of the restrictions.
“Banks are reluctant with their lending at the moment and there’s pretty much no appetite for them to lend to people who don’t have the 20 per cent deposit as they don’t want to expose themselves to someone potentially going into negative equity,” he says.
However, the lifting of the restrictions and the mortgage relief measures introduced by the banks will minimise the risk of a property market collapse.
First Home Buyers Club director Lesley Harris says removing LVR removes a big obstacle for those wanting to buy their first home. “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 percent deposit. Deposit requirements are often the biggest factor that prevents people getting into their first home,” she says.
