Investors rushing to secure low deposit mortgages before high LVR restrictions are reintroduced may not add as much fuel to the housing market fire as people are expecting

Investors rushing to secure low deposit mortgages before high LVR restrictions are reintroduced may not add as much fuel to the housing market fire as people are expecting

By Greg Ninness

It will be interesting to see how the housing market reacts to the Reserve Bank’s surprise announcement that it's considering reintroducing high loan-to-valuation ratio (LVR) restrictions on new mortgage lending.

LVR restrictions were removed as part of a range of economic stimulus measures designed to combat the recessionary effects of the COVID pandemic earlier this year. They were originally intended to be removed until at least May next year, but the Reserve Bank says it is looking at bringing that forward and reintroducing them on March 1.

It is tempting to think that it will cause an immediate rush of additional buyers onto the market, eager to get low deposit loans approved while they still can, and that will cause the housing market to become even more over-heated than it already is, until the restrictions come into force in March.

If that does turn out to be the case, we could expect a very hot market indeed for the next few months. But there are three factors which could work against such a scenario.

The first is that LVR restrictions are far more likely to be applied to property investors than they are to first home buyers, or existing home owners looking to make a move into another property. So while investors looking to secure low deposit loans may feel some urgency in getting their deals stitched up as quickly as possible, first home buyers and existing home buyers may not feel the same pressure.

The second limiting factor is that although any new LVR restrictions will not be introduced until March, banks themselves may start restricting the number of low deposit loans they approve well before then. So investors may start having greater difficulty getting low deposit loans approved sooner rather than later, and that would act as handbrake on their activities in the housing market, relieving some of the pressure.

And finally, we may see that FOMO (fear of missing out) which has driven much of the market exuberance over the last few months, could be replaced by FOMU (fear of mucking up).

The Reserve Bank’s move is seen as an attempt to cool the market, which implies housing prices may at least flatten or even decline slightly next year. And no one wants to mortgage themselves up the hilt only to find that their property is worth one or two or three per cent less next year than it was when they bought it. Even if prices just flatten, that could take some of the urgency out of many buyers’ plans.

But if plans to reintroduce LVRs do stoke the housing market fire even further, it will likely be a short lived blast. There is just over a month left until the market starts to wind down for the end of year break and trading over January is traditionally at very low levels, which only leaves February for it to wind back up again before the changes take effect.

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The game for investors now is to get a valuation, borrow max against their rentals and sit on cash waiting to snap up some deals - post March?

I wonder however if there could there be a rush of people listing properties - hoping to get max $ before March? Could this prop up supply?

Why would there be any "deals" post March?

LVR restrictions come back into play, mortgage defferals ending, forced sales, unemployment increase...

LVR restrictions didn't do much to quell the market when they were on in the first place - prices still kept ramping up. The deferrals are generally being worked through by the banks now anyway so there won't be many forced sales and unemployment isn't skyrocketing as first projected. Also we have returning expats so I doubt there'll be many "deals" around tbh.

Think of it as a near zero cost call option. Getting the max you can as a mortgage before the LVRs come back in a revolving credit (or offset) facility should only cost you a few hundred, if even that. If a crash happens after March you buy with that money, taking a new mortgage over the new property with a different bank (so that the original bank does not have to reconsider your existing borrowing against the new LVRs). If no crash happens, you don’t lose anything.

Exactly, that's the game. Got to be in it to win it.

"LVR restrictions didn't do much to quell the market when they were on in the first place"

That's simply not true, go back and check the timeline. Almost immediately after increased LVRs came into play late 2017, Aucklands market flatlined (and even decreased slightly). Most people wrongfully credit the amendment on foreign buyers, but the market was already flat when they came into play (effect never comes before cause). However, the increase in LVRs was short lived, and prices started on the rise again as soon as they were relaxed.

Chinese capital controls were introduced in July 2017. Following this, multiple internal markets cooled. I don't think locals LVRs were the sole cause in NZ.

You might want to read this other article, LVR restrictions have fueled a trend of high risk loans from banks in the last few months, so it does make a huge difference.


The RB is pouring petrol on the housing market by further reducing interest rates via its FLP

One way to look at is that this massive give away, massive transfer and gifting of wealth, is the Govt making good the massive cost, massive economic damage done by lockdown.

You take away the property wealth uplift, then the joint has nothing.
Young people disadvantaged.
Look at Shaw now wanting further and tighter economic close down.
Primary producers treated like muck.

PM & GR probably praising the socialist "gods" that house prices got nothing to do with climate change.

# green recovery driven by John Deere.

This is too much.

PM Jacinda Ardern on house prices: 'It just cannot keep increasing at the rate that is'

The PM is a certifiable genius, no doubt bout it.

She doesnt appear to be the sharpest tool in the shed.

She still argues that supply is the solution to a credit driven property bubble.

In a pure sense, if supply can equal demand, then no price increase will happen, even with low credit costs, or high immigration.

So 1) we do have a supply problem, but 2) what Labour calls supply is not supply at all, as it is not designed to equal demand. It's like saying air is free to breathe because there is plenty of it, but you can only get access to it every five minutes.

And 3) it's the cost of supply as well as the amount of supply that is the issue.

Building on expensive sections only makes more expensive houses, and unless demand tanks and a bust happens, then the saving the new owner gets is because the old owner lost.

I saw that too. Utterly gormless. I have no confidence that they will make any impression on the housing crisis.
Is it time to start a single issue political party in preparation for the next election. The housing party. Get housing right and a lot of other problems will be solved.
Objective - make plenty of housing available at affordable prices. Who might support that. Those that do not own homes. 50% of the population; their parents because most have low or no mortgage so they are unaffected buying and selling on the same market. Who will oppose it. Landlords and property speculators. They only vote National or Act and that will not change, so who cares? Recent purchasers with mortgages. Yes you have to feel sorry for them but they still have the houses that they purchased and they still have their salary. they will lose out on inflation paying off their mortgage but I would suggest that that is an unreasonable expectation and the root of the whole problem. It is an unreasonable money for nothing expectation that needs to be broken for ever.

The Government has to get the investor cohort out of this property market

RBNZ macro tool-box can treat all investors as businesses @ 8% interest rate

That way retail banks can push FLP funds out the door at investors till the cows come home
That way RBNZ and Banks and Government won't have to finesse who gets FLP

Put the brakes on unrealised equity gain to leverage on another house. If a borrower cannot even cough out the bare minimum of a deposit except by dipping into the equity, he is just sinking himself into greater debt. Would RBNZ care? Having set the house on fire, hold back fire-fighting till March. Let it burn to the ground. The photo nicely sums it up

I think this is getting to be a really dangerous situation now. People are having to borrow way too much on sky-high valuations, however low interest rates are. Drive around Auckland and tell me again how a lot of the badly located, drafty, manky dumps are worth a million or more. It’s a joke. I own a house outright in Auckland and have plenty of other investments, so it benefits me, but I’m not deluded by current valuations.

Cost of Labour, Cost of land, Council costs, Cost of materials.

We raise the minimum wage so skilled trades people put their rates up to maintain their deferential multiple. This drives the cost to build new houses up which I turn supports higher house prices in the secondary market (where you don’t have to wait a year to get the house you buy).

Tell me about it. In the process of planning a rebuild, Building costs are very high in NZ.

It is cost of land. The council judges my home as being $250,000 house and $800,000 land but the land is sloping and has a difficult access. Alternate use of land before it was built on was growing strawberries - if force to return to that purpose it would be worth about $10,000. Second to irrational cost of land is irrational council behaviour - the big cost to any investor would be the delay and inconsistent decisions made by the council. I suspect our labout costs per hour are low compared to other developed countries; but productivity likely worse.

NZ is one of the most expensive low skill labor countries in the world. But you are right, land is the largest component of price. But underlying the land price, is the cost of the needed infrastructure, which is very expensive because it will be very expensive for NZ government to build anything. If it is expensive for you to build a drive way, it will be 5 times more expensive for the government.
Finally, for new built (and all houses where a new built sometimes ago) there is the tax component which is added up to land and built (GST). Which you pay all upfront, before you even start using the house. In fact you are yet to earn your income to pay it. If you reverse the present value calculation of what you pay upfront over the time you complete your purchase, it becomes obvious that you are paying an insane amount of tax.

Yes, but councils simply jack up the value of the land vs the house because they get a far bigger % of rates from land than they do the capital value of the house. Quite the joke really and they think people don't see right through this façade? Whatever, they have to get their money from somewhere, just don't use council valuation to value your property as it has no bearing on what your land and capital improvements are actually worth.

Normally these "investors" are sitting in the Koru lounge taking photos of themselves drinking champers and posting it to instagram prior to the 2 month Europe trip.
I think the property insanity is a sign of boredom. It will settle down/reverse once the borders re open...

The higher it gets, the more likely it is to reverse rather than slow.

Of course. It is the RBNZs full intention to stoke the housing market. Why would they have reduced interest rates so much. It is to promote housing and house building which trickles down through the economy in myriad ways. Why is anyone surprised. They are actually trying to FORCE savers to invest in property through their decimation of term deposits. Nothing un-transparent here.

I ran across this headline today Link Here and decided to do a visit to to see how they would cover the very "National" sounding quote from Adrian Orr. Not really a peep here.

The headline:

Reserve Bank Governor Adrian Orr describes high house prices as 'first-class problem', alternative is 'depression'

Let them eat cake indeed...