By Greg Ninness
Mum and dad investors buying residential investment properties in Auckland are likely to be most affected by the new loan-to-value ratio (LVR) mortgage lending rules due to come into effect next month.
An analytical note by Hayden Skilling issued by the Reserve Bank has analysed the impact of the restrictions on bank's high LVR residential mortgage lending introduced in October 2013. These have restricted banks to doing no more than 10% of their mortgage lending to borrowers with deposits or equity equivalent to at least 20% of the house price.
The note says although the policy initially dampened the housing market, prices began taking off again late last year and that much of that increased activity was driven by investors, rather than owner-occupiers moving house or first home buyers.
"We find that increased houisng market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit," the note says.
It also found that most of the extra investor activity came from smaller rather than larger investors.
"The primary driver of rising investor activity since October 2013 has been an increase in purchases by smaller investors (those with between two and four properties), as opposed to portfolio expansion by larger investors," the note says.
"This is particularly the case in Auckland, and suggests that smaller investors have been leveraging up in pursuit of capital gains."
This group was heavily reliant on credit to make their purchases, so they were the ones most likely to be signficantly impacted by the new, tougher LVR restrictions on Auckland residential investment properties when they come into effect on November 1. The new rules mean borrowers will generally need a 30% deposit for a mortgage loan secured against Auckland rental property.
However, restrictions outside Auckland will be eased from November with banks able to make up to 15% of their new mortgage lending to borrowers with LVRs exceeding 80%, regardless of whether the borrowers are owner-occupiers or residential property investors.
"Given that the LVR policy is likely to be more binding within this relatively over represented group (Auckland investors), the incoming changes to the LVR restrictions might be expected to have a significant dampening effect on Auckland housing market activity and house price inflation," Skilling's note says.
The note also found that existing LVR restrictions have not caused a significant increase in cash purchases (made without a mortgage) or in the volume of mortgage lending by non-bank lending institutions.
To read the Reserve Bank's full analytical note, click on this link.
24 Comments
It seems pretty clear from the 'note' that the gains in orcs have come from 'small investors, using leverage' which should have been obvious to a blind man, and equally as obvious should be the result once said small investors discover that the liquidity tap has run dry, and all they have left is some negative free cashflow.
Take note - Cash Purchases - No mortgage required.
The Reserve Bank (RBNZ) knows - wonder how it knows - it's not telling
Psssst - IRD and other Government functionaries
Quote from the note
The note also found that existing LVR restrictions have not caused a significant increase in cash purchases (made without a mortgage) or in the volume of mortgage lending by non-bank lending institutions
Hey Greg - any chance of finding out how many cash-jobs are done each month or quarter
the only way to protect yourself now is to buy something that you can add value (so you can offset the price drop) or buy something unique (great location, nice section, property that ticks many boxes etc.) as those types of properties will hold the value. When the crisis will come ... crappy property will became a crappy property again.
Definitely agree. I was commenting from my personal perspective as a home buyer - not investor/speculator. I have bought a house, out west being outbid numerous times by the people driving luxurious cars or developers. I bought a big do-up and I have very limited funds to make it up (impossible to pay the builder!) I hate 'investing' into properties and it should be heavily taxed. It is basically screwing many, many people....
I bought a house to use as a house/office which makes me contrarian. It was tough getting the 20% together with house price inflation but the LVR rules helped me get a better deal at the time while the market adjusted. Now I'm investing in far more product asset classes.
The Auckland property market reminds me a lot of the way people were hyped up about the stock market and over leveraged property investment in 1986.
They are a symptom rather than a cause of increasing house prices. One doesn't leverage and invest in property if one thinks it's a bubble to join. One invests because one expects prices to rise because of a fundamental lack of housing supply. Lack of supply is a rising tide - you don't stop the tide rising by trying to flatten out some small surface ripples.
Listen to the chatter - more like the following
While things are running hot in AKL, where the number of Resident Visa's and PLT's lobbing into Auckland exceeds the number of new houses being built and completed (note: completed builds - not consents issued) then price pressures will continue - until you hear one, or some, of the following
(a) More builders migrate into AKL from overseas and ChCh
(b) There is a significant voluntary drop off in Visas and PLT's
(c) Central Government controls migration
(d) Another GFC event occurs
(e) build completions exceed 20,000 per annum
Meanwhile - carry on regardless
NB: inbound migration just hit another record - not slowing is it?
30% equity and 70% borrowed 8 years ago invested in the right suburbs (ones with least investors) is now 70% equity and 30% borrowed. Negative population growth/migration and/or impacts of PAUP on supply are the only things that will scare investors. Couldn't care less about LVR's or tax.
Most experienced/serious Auckland property investors with adequate equity over a wide ranging portfolio will not have any problem with the 30% LVR - in fact it will be easier for them to buy as this irritating Mom & Pop investors will be gone, as will the Chinese foreign based buyers who will not want to give an IRD, bank account # etc. So expect business as usual for the lower geared experienced Property Investors.
Dampen Auckland housing market ? LOL That will be the day !
I think they have got this wrong , its new (- ish) migrants who need somewhere to live that are pushing up prices
I don't know anyone in the Mom and Pop investor category that has bought another Auckland investment property lately .
And our Asian friends arriving here are the tip of the iceberg .... I read recently that only 2,9% of people in China even have a passport .
Yeah because working in a Foxconn sweathop means they can snap up zillions of houses in Auckland amiright? What with that 5k of lifesavings that they put into the stock market having halved in value in the last few months they'll be flush with cash aye, prolly wont even need a mortgage. Being so financially literate they would have scoured the globe and discovered Auckland housing is 'the best place' on the planet to put their millions of spending money. Better hurry up and beat the rush, I know I am, because there are over 1 Billion Chinese and only 600,000 Auckland houses for them to buy ;)
Boatman sayin it as it really is.
Do you ever wonder why the lever-pullers and the commentariat never question what is really causing the continuing boom in Auckland property prices.
One thing is definite - the lever-pullers have gone deathly silent the last couple of months, instead, info-tainment with revelations of peeing in the shower. Leadership at work
This is unfolding to be a major c()( -up .
First a 20 % LTVR was going to solve the problem .
Now its 30% .
Why don't they just make it 100% cash and stop the NZ banks lending completely ?
I'll tell you why , because it wont make any difference to buyers from Asia who will use syndicated money , cash or offshore borrowings .
The AML Legislation has still not been extended to real estate agents , and for the life of me I don't know why not ?
Maybe Mr Wheeler or Bill English can explain why not ?
Ma and Pa investors are simply using housing as their private retirement schemes.........People like B Hickey keep writing that universal superannuation is unaffordable so by hell or high-water an investment house is purchased......like all investments some people will get into trouble, others will do well.......
In my neck of the woods we have door knockers pushing real estate investment and their advice is 30 mins free!!!!!
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