Four years after they were introduced to combat a rampant house market, the loan to value lending restrictions appear likely to be phased out soon; but how, and what happens next?

By David Hargreaves

It was, as ever for a Reserve Bank prognostication, punctuated with meaningful silences and with very lightly twitched eyebrows, but I think the RBNZ's Acting Governor Grant Spencer signalled last week that the central bank's about ready to start releasing the handbrake on the New Zealand housing market.

The loan to value (LVR) restrictions have been with us now for a little over four years (yikes, where did the time go?) and there were probably a few people out there - yours truly included - who thought they might be with us forever.

But maybe not.

The RBNZ has got its next Financial Stability Report coming out on November 29. These reports in the RBNZ's words "assess and report on the soundness and efficiency of the New Zealand financial system". The reports, published since 2004 are, in my words either as dull as ditchwater or extremely newsworthy depending on the issues of the day.

Well, the next one is likely to be in the latter category, with Spencer having indicated that the bank was in regard to the LVRs "reviewing the restrictions and the criteria that we would adopt for their removal. We'll be saying more about that at our Financial Stability Review..."

What should we expect then?

The evolution of the LVRs

It's worth briefly recapping the evolution of the LVRs. They are one of the 'macro-prudential tools' (there's currently four in total) that were signed off in a Memorandum of Understanding between the RBNZ's then Governor Graeme Wheeler and then Finance Minister Bill English in 2013.

The LVRs were officially introduced on October 1, 2013 through a 'speed limit', with banks unable to advance any more than 10% of their new lending at LVRs in excess of 80% of the value of the property being mortgaged.

They worked. House prices backed off from their super hot intensity of 2013 over the following year. However, while the RBNZ was quick to talk up the success of the LVRs - no assessment of the housing market in 2014 is complete without reference to the four (erroneous) interest rate hikes that the RBNZ implemented that year in the belief that inflation was about to surge. The rate rises were ultimately reversed, but there can be no question that having these rate rises on top of the LVR restrictions would have been a significant dampening influence during 2014.

By 2015 interest rates were heading back down again - and the housing market, most particularly in Auckland, was off to the races again. The RBNZ responded with LVRs II. (These were announced at one of those 'very newsworthy' Financial Stability Report releases). From October 1, 2015 in a new development Auckland housing investors had to find 30% deposits on purchases in the Auckland area. The 10% 'speed limit' for high LVR bank lending was retained on owner-occupier mortgages in Auckland - but elsewhere in the country it was loosened slightly to 15%.

The Auckland experiment

It's worth remembering that the RBNZ was originally very tepid, to say the least, on the idea of Auckland-centric LVR measures and didn't seriously consider them for some time. It changed its mind though, possibly against its better judgement - and perhaps subsequently regretted that it did.

The measures didn't work. With interest rates now low again and falling further, the new iteration of LVRs arguably only helped to pour more petrol on the house fire. It seemed that in Auckland, any investors who couldn't get over the line with a 30% deposit for an Auckland property switched their sights to places like Hamilton and Tauranga. House prices in the regions, which had been relatively subdued, now took off as well, fuelled by a combination of the Auckland investor property thirst and by the slight loosening of LVR restrictions for local owner-occupiers. 

So, come the middle of last year, with a now nationwide raging house market, and with no sign of interest rate rises on the horizon, the RBNZ had been firmly caught with its LVRs down. It reached for the blunderbuss. On July 19, 2016 it unloaded a 40% deposit limit on all housing investors - nationwide. The 'speed limit' for the banks of just 10% of their new lending on high LVR loans for owner-occupiers was reapplied right across the country. Officially this change came in again on October 1  but in reality the RBNZ asked - and the banks acquiesced - for the 'spirit' of this new rule to be applied on the date of announcement; that is, July 19.

These measures have had an impact - that is without question. But once again, like in 2013-14 it is not quite as simple as saying that the LVRs came and the housing pressures went. In the past year it's not just been the new supercharged LVR measures having an effect.

Banks happy to hide

There's no doubt the banks, facing their own pressures have been - to some extent at least - happy to hide behind the RBNZ and its rules in order to cut back on their lending.

The banks have faced funding pressures stemming from greater capital requirements being made of their (mostly) Australian parents, while a shortfall of deposits has provided a squeeze on funding. They have been 'rationing' credit and pushed some interest rates up. 

Additionally, with new restrictions placed on withdrawal of money from China, the overseas buying interest has definitely receded. This is, however, a subject that remains in many respects anecdotal in nature since the information collated on overseas ownership of New Zealand houses is by no means complete or comprehensive enough. Interesting that the new Government is pledging a proper register on offshore ownership of land and housing. This is a very long overdue measure that the previous Government steadfastly refused to countenance.

And then there was the election, with the uncertainty of what might happen in terms of the result, causing the housing market to seriously hit the pause button.

Now, after the election, we had the uncertainty of who was going to govern, followed by the uncertainty of just what and when the now new Government would apply in terms of housing policies. 

Sending signals

The planned ban on offshore buyers of existing houses, while largely symbolic in nature, shouldn't be underestimated in terms of the signal it will send out that New Zealand is no longer an 'easy touch' for overseas investors looking to throw a bit of spare change into some bricks and mortar here.

The extension of the bright line test regarding tax on profits on sale of houses to a five-year period should also be a dampener. 

The intentions to build more houses - if aggressively followed through on, and there are a lot of ifs with this, given the labour and materials constraints in this country - should take some pressure off the housing shortages.

Add all this up and the housing market should be restrained for the foreseeable future.

So, the chance is definitely there for the RBNZ to start loosening the LVR restrictions. Note that the word is 'start'. The RBNZ has already clearly signalled it won't lift the measures in one go. 

What to expect?

All of which raises the question of what might be expected from the November 29 announcement.

I would be surprised if we see any lifting of restrictions immediately. With its essentially cautious nature then it is to be imaged that the RBNZ would want to get through the 'hump' of the summer housing market before lifting any restrictions.

The best guess is that the summer market will be quiet this year, but the RBNZ might not yet want to risk reigniting anything. Therefore I would see it unlikely we would see any lifting of restrictions in the first quarter. Could be wrong of course, but I think the RBNZ will want to signal well in advance.

Assuming such is the case, what comes first?

It was worth noting that the RBNZ in its comments around the release of the latest Monetary Policy Statement last week expressed confidence that some of the new policies being introduced by the Government on housing would help to keep demand from housing investors moderate. Yes, specific reference to the investors.

Investors come first

That would suggest me that the 40% deposit limit for investors will be the first to be relaxed. Would it be removed in one go? Probably not. It could be moved back to say 30%, maybe say from April on, and see what happens. And if that works, well maybe a further reduction later in the year.

But what about the 10% 'speed limit' applied to banks on lending over 80% for owner-occupiers?

I would be surprised if this is removed very quickly. 

The real estate industry prior to the election launched a strong assault to get the LVRs removed for first home buyers. There was a problem with the logic though. The official figures show that since the investors have been forced into backing off, the first home buyers - restrictions and all - have been able to get a better share of the market. They ARE finding ways to buy.

The RBNZ might be cautious about lighting the blue touch paper for scores of wannabe FHBs to come forward. Therefore, my suspicion is that the RBNZ might hold fire on announcing any change to the LVR speed limit at the end of this month and might instead push the whole thing on to its first Financial Stability Report next year, in May. 

Really it depends how much, either real or perceived, pressure the RBNZ is feeling under from a new Government that prior to the election indicated it wanted LVRs gone. Perhaps the RBNZ might signal a loosening of the 'speed limit' for the banks - say to 15%, as was done previously, again perhaps after the first quarter of next year. As I say, it depends how under pressure the RBNZ feels on this.

Gone by 2019

When might LVRs be removed in entirety then?

I would say they could be gone by the end of next year - if the housing market doesn't take off again.

One significant factor though will be whether the RBNZ can get a concession from this Government in terms of putting some sort of debt servicing measures into the 'macro-prudential toolkit'. 

Previously the RBNZ was dead keen to get access to debt-to-income ratios, even going so far as stating it wouldn't use them at the moment, in order to try to get the previous government to agree to them. The National-led government wasn't having it and kicked the thing into touch till after the election.

Still making sense

Acting RBNZ Governor Spencer said last week: "We still think that it makes sense to have some sort of macro-prudential debt service tool in the macro-prudential toolkit but at this stage we are planning to sort of wind-in that issue into the macro-prudential review, which we are conducting jointly with Treasury over the coming several months."

So, the DTIs as originally envisaged are sounding like a non-starter, I infer. But if the RBNZ is to remove the LVRs I think it would make abundant sense to put some sort of debt servicing measure into the macro-pru toolkit as an additional back up for future. I would rather 'next time' see a debt servicing tool used first before LVRs.

The LVRs have done a job. But they've been a fairly blunt instrument. Nobody's going to be sorry when they are gone and there just may be better ways of reining back demand for housing investment in future.

Whatever happens, it's worth noting November 29 in your diary.   

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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40 Comments

You could well be right John W. It does seem odd that they would want to lift their LVR lending restrictions on Investors, especially when the Government has pledged that it wants to make property more affordable to FHB's. Now that the foreign buyers have mostly gone.

So I'm assuming that they've run the numbers and are now trying to dampen down the effects of a property crash or large market correction.

Seems to be that the so-called "crash" is always coming - but never actually arrives. It's the most illusory, fictitious subject discussed here.

I remind readers that a year ago plenty of people here were adamant that 2017 was going to be the year of a big crash in housing prices....... especially in Auckland.

And what transpired was a paltry 1% (average) fall in Auckland house prices - while the inner city suburbs continued to register price increases.

Of course, the response will now be that the crash really is coming and is almost here - just need to wait a little bit longer.....

We'll see.

My view is that the Auckland housing market has an underlying resilience that few here would dare acknowledge.

TTP

Most predictions are wrong, aren't they? Look at how people were similarly predicting houses would "take off!" after Chinese New Year, winter, the election etc. etc. etc. And upwards and onwards, 10% per annum for ever and ever amen.

Things seem to be interestingly poised. We're still sitting on the most massive accumulation of household debt, the ability of new locals to enter the market is constrained, and a reliance on foreign buyers is similarly being reduced. At the same time, if the USA starts to unwind QE we may see our cost of accessing debt increase.

Interesting times, and certainly very hard to call what will happen.

i think you will find housing will continue to go up until the crash.
You will know it when you see it.
"the Auckland housing market has an underlying resilience " Nope.

It often takes a few years to go from peak to trough in developed housing markets. When was the peak in NZ housing market? Oct 2016? Could be years before it bottoms out. Or it could plateau for the best part of decade like it did in most of NZ after the GFC

I have been really really struck by the blind faith many NZ-ers have about the housing market, so am not in the least surprised that the psychological barrier that would facilitate a crash has not been breached. And there is a possibility that it might not be. If the majority of sellers can resist the necessity to sell, and ALL hold on to their properties, then maybe the crash will never come? But there is also every likelihood that many NZ housing owners will not be able to hold out. Just a look at the debt to income ratio of the NZ household shows you that Kiwis are up to their eyeballs in debt. Deleveraging will probably need to happen at some point, it usually does.

the blind faith comes from the simple reason that people do want to move here
this time round the problem is that the bubble is across borders & asset classes

TTP, you said previous some Specuvestors are astute and savvy. Are you referring to investors that are already either cashed up on the sidelines or in it long term, no matter what? As you already know, the reason the RBNZ introduced LVR was to lock out Specuvestors that were indulging themselves in ways that were anything but astute and savvy. Greedy-yes. Specuvestors are still heavily invested in the market, are eye poppingly leveraged with interest free loans against lofty valuations. Simply put, they pose an underlying risk to the financial system. Whats does it say about their behavior when RBNZ felt the need to stop them because they couldn't stop themselves!. Remember 80% of bank loans are backed by property. Given lofty valuations at every turn, a term deposit earning 3% after tax is a good place to be for quite some time to come.

The end is nigh Lol

Yvil....only if you're lacking insight to the mounting risk.

Surely we want FHB to have more access to the market? Why on earth would we want MORE investors in the market, the housing crisis is not about investors not having enough access?????

FHB will be the worst affected if there is a crash. I'm not sure we necessarily want to encourage lots of them to take overvalued properties off investors hands, only to have bailed them out and ended up underwater themselves.

The housing crisis is not an ownership crisis (although thats also a problem), it is a crisis of too few homes.

It's not first home buyer land banking, moth balling, flipping and negatively gearing all for perceived future capital gains. The lust for capital gains must undoubtedly be exacerbating the homes shortage, or people would develop land instead of banking it and they wouldn't be leaving homes empty.

Investors are actually betting that rent will be higher in the future and that this will lead to higher prices. The reason negative gearing happens in housing is the same reason it happens in stocks, income rises. What looks negative today is positive tomorrow.
Here is some interesting math on the issue. If you buy a house with no deposit, at a cost of $500,000, yielding 5% with 20% costs and a 5% interest rate that is cash flow negative by $5,000 in year 1. If you capitalize that loss in a ring fenced environment and assume rent and property prices only grow at the rate of inflation, then that property is cash flow positive after 17 years. You have paid nothing for it, but it now makes you money.
After 30 years, having never paid a penny, having been negative for the first 17 years, you will have $400,000 after sale. Thats $215,000 in todays terms. And you know those losses that were ring fenced mean you dont pay any tax on the last 13 years which were cash flow positive.
Investors buy cash flow negative property not because they are speculating on capital gains, but because they speculate that over long periods of time income will rise. The same reason investors buy stocks with low yields.

It's not an either/or scenario. Both are equally true. Not only do I know investors who specifically bought properties which were negatively geared because of perceived future capital gains and reduced tax bills, but some "property gurus" actually gave talks on this!!!

And it's not true that you haven't paid a penny in the investment, if you are negatively geared you are topping up to cover the mortgage and no doubt maintenance and rates also. You have paid a great many pennies. And you don't buy without a deposit so why present that scenario? You put down a deposit so there is an opportunity cost to that money. You could be getting a decent yield from it elsewhere, and with far less hassle than landlording.

Hi, as i note I capitalized the loss in that example so no, not a penny was paid. As to the opportunity cost and lack of deposit, im assuming they have equity. If they want to borrow that money and put in to stocks then sure, that is an opportunity cost of sorts, but we are splitting hairs at that point.
People who say they are buying property to obtain long term capital gain are simply summarizing the actual economic mechanic by which that occurs. The mechanic that causes prices to rise long term is rising income.

@gingerninja Most empty homes are bachs i think? The percent of standard homes in the suburbs that are empty is small and of that small number those that are held as investments are almost certainly associated with laundered money. Investors do not typically leave homes empty for obvious reasons. As to land banking im not sure how much of that is really profitable at these prices. A lot of it is substandard land with complex drainage and similar issues like council zoning restrictions. As prices rise more banked land will be made available but im not sure if its really any different from any other highly demanded city. In terms of what land bankers are betting on, they are betting on rising average income for rentals and rising income more generally to drive land prices up. So they expect income to rise, they know that will drive capital gains yes, but the mechanic they need to occur long term is rising income, because without that there is a limit to capital gains.

Gradual withdrawing of QE will see LVR handbrake replaced with ongoing tightening conditions. Even without another GFC, I think house prices will continue to drift - down. FHB there is no hurry.

"There's no hurry". No certainly not. The same comment came in 2016, 2015, 2014, 2013 ... actually going all the way back to 2009.

So at some point some of us need to bite the bullet and ride the ups and downs like the rest of the nation.

So long as you're going to live in the house an extended period .. then you shouldn't try and time the market. You will get it wrong every time.

True, as long as your income can also service the loan in an much higher interest rate environment.

This is daft, I'll take a blunt instrument that has the desired effect any day rather than a bunch of esoteric fiddling that maybe might almost sort of do something kind of similar maybe.

Now speculators can refinance the place they had to put a 40% deposit on, pull out three quarters of their equity then pick up three more properties ending with, say, 10% equity in each? Reminds one a bit of Bush II's 'Ownership Society', aka lax underwriting standards and ramapant overleveraging? What could go wrong?

FHB are actually fewer in number less in 2017 ,less than 2016, less than 2015. The RBNZ is acutely aware that the Auckland housing market and by default in quick time nationwide, that the housing market has stalled , confidence is ebbing. When fundamentals are so far out of whack, confidence is all that matters. Meaningful DTI levels will never be introduced until there is a substantial fall in prices.

Might be ab it early but probably should happen. Given this thought experiment - the Akl 3 bdr median price in Sept 15 (https://www.interest.co.nz/property/87181/median-rents-50-week-over-last...) median rent was $590. Almost 2 years later median increased by 5% to $620. Looking at the overall rate of increase of median house price though (https://www.interest.co.nz/charts/real-estate/median-price-reinz), things were relatively steady until 2007 when the curve suddenly took off. So if we take Feb 07 as a rough yard stick at a price of 435K measured to Mar 17 at the latest peak of 905K - that's a 108% increase. During the same period, median rents increased 53% from $400 to $615. So by logic, if it stands, the actual median calculated at a 53% increase from the 07 price of 435K puts the current 2017 actual median at 665K. Or 6.7 x the average Auckland household income of 98,621 according to https://www.stuff.co.nz/business/98016625/auckland-tops-income-table-as-.... Which seems about right to me. It'll take at least another 12-18 months to get there IMO, so might end up a little higher given the continuing overall upward median trend. But as it starts to ease we should be loosening restrictions.

Ezy you cant brute force a calculation that way. You need to calculate based on affordability, so as interest rates change, house prices change even without rent changing. When you sum it all through we are approx at 2007 again but with a housing shortage.

Sure, it's a back of the napkin kind of exercise. But, with the ability to negatively gear a property being removed rental return is the key indicator, and looking at that trend is highly relevant at the moment. Especially given the relatively constant mortgage rates since 2007.

I doubt that lowering the LVR rates will have much effect for Auckland Investors. Since it's the Ozzy banks that control most of the liquidity and they have sensiably stopped lending to overseas Speculative Investors and that includes Kiwi speculative investors.

Remember how, as this article infers, the RBNZ 'stalked it up' by discriminating against Auckland and setting fire to the rest of New Zealand? Well, guess what, RBNZ? Remove the LVR's and you'll make a mistake far worse than the one you made re Auckland......

Might want to keep the handbrake very firmly applied until we see some material change in the supply-side situation. It's one thing to sift tea leaves and speculate on the future but at this point the government haven't even broken ground on new developments. With the changes to minimum wage and tighter employment market pushing incomes along I would think there may be plenty of upwards pressure on prices as well.

The LVRs are in place to protect the most vulnerable to a market correction, FHBs and amateur "investors". One dares to say a correction is needed to bring House Price to Income ratios to a sustainable level. The past year or so has seen many FHBs buy into an insane market where an increase in interest rates of just 1 or 2% would see huge mortgage stress. We all know it would take decades for wages to lift to meet current house prices even if house prices stayed stagnant.

JRSNZ LVR's are in place to reduce house price inflation without having to use interest rate hikes. They are a tool to manage market stability and will be increased as prices rise and reduced as prices fall.

It's ridiculous to make the assertion that reducing LVRs when prices are plateauing or declining from the peak will magically increase market stability.

Reducing LVRs now will only prolong the peak, encouraging market participants into increasingly leveraged positions... reducing stability as recent purchasers have less equity headroom at inflated price levels.

Or in short, dumb.

Agreed, I'd have thought RBNZ would have waited for house price-to-income ratios to fall substantially before removing LVR restrictions to ensure market stability. Again putting time frames and expectations in place is likely unhelpful as there need to be changes within the economy to accomadate these proposals. Lets see what real impact the government has on the supply situation, it took us more than a decade to get into this mess and it may take longer to extricate ourselves.

cmat it should be obvious to you that the RB does not want prices to fall substantially, they dont want them to rise much but they dont want them to fall much.

Reinz haven't released their monthly sales stats as they have for the last umpteen years on generally 11-13th of month. Something amiss?

They advised earlier today that this data will be released at 9am tomorrow (Wednesday, November 15, 2017).

With the prospect of LVRs being lifted we can expect house sellers to wait until that time for the boom in credit that will be once again be unleashed. As a result housing sales and purchases will likely stagnate until the date that RBNZ lifts the limits.
Perhaps good for house owners, but FHBs can abandon any hope.
Pity the RBNZ takes no account of the impact of its policies on FHBs.

I overheard an interesting conversation the other day, possibly involving a real estate agent. Along the lines that last month there were more agents employed nationwide than houses sold. Tough times.

...they were told and believed more Chinese money coming, it's all a one way bet and good times are just around the corner.

The fact that the Gubmint is not operating under an announced (and adding-up) Budget also won't be assisting the RBNZ deliberations. There's plenty of 'Mo' Moolah for Y'All' expectations being ginned up and conversely Die Grünen is agin the TPP (or whatever it called today). IIRC the RBNZ 'assumptions' doc sounded very wary about this whole schemozzle..

Oh well, this too will pass.