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RBNZ decides to further extend the exemption from LVR rules for newly constructed homes to assist in creation of new housing stock

RBNZ decides to further extend the exemption from LVR rules for newly constructed homes to assist in creation of new housing stock

By David Hargreaves

New house buyers are going to be cut more slack by the Reserve Bank under the terms of the revised LVR rules coming into effect on October 1. Buyers will now have six months after a house has been built to buy it, rather than needing to be pre-committed before or during its construction to get an LVR exemption.

The RBNZ says the proposed relaxation around the exemption for new builds is to encourage creation of more housing stock, particularly in Auckland.

The new LVR (loan to value ratio) rules, announced on July 19, will see a requirement for investors right around the country to have 40% deposits to buy investment properties, while nationwide banks will be limited to advancing no more than 10% of new lending for loans with LVRs in excess of 80%.

Between July and August the RBNZ opened up the proposals for consultation. An immediate concern raised by the banks was that the proposed start date of September 1 didn't give enough time, so the RBNZ last month deferred the starting date to October 1.

Now today the RBNZ has released its response to the submissions, along with the final version of what will be implemented next month.

The details of the rule changes are largely as were originally announced. However, buyers of new houses have been given more wiggle room.

When the first round of LVR restrictions (we are now on round 3) was announced in 2013 there was no exemption at all in the rules for construction of new houses. In December 2013, more than two months after the LVR rules had taken effect, the RBNZ then announced that new builds would be exempt - backdated to the October 1, 2013 start date of the LVR regime.

At the time (December 2013) RBNZ Deputy Governor Grant Spencer said: "The Reserve Bank has recently consulted with the building industry and banks on the impact of LVR restrictions on residential construction activity. While high LVR construction lending is only around 1% of total residential lending, it finances around 12% of residential building activity.

"This exemption means that low deposit lending will fall outside the 10 percent speed limit if it is financing the construction of a new house or apartment."

However, the exemption was only for when the borrower committed to the construction or purchase of the new residential dwelling prior to the commencement or at an early stage of construction of the dwelling.

But now this will be extended, the RBNZ said today.

"The RBNZ continues to highlight the fact that growing imbalances in the housing market require policy action on a number of fronts," the RBNZ said.

"A broad range of initiatives are necessary to increase the long-term housing supply response, particularly in Auckland, and to help ensure housing demand is kept in line with supply capacity. The construction exemption is designed to prevent any negative impact of the LVR policy on the supply-side response to housing supply shortfalls.

"The RBNZ acknowledges that some widening in the scope of the construction exemption would be useful in assisting the financing of new dwelling construction.

"All newly built entire dwellings completed fewer than six months before the mortgage application will be eligible for the construction exemption, where the dwelling is being purchased from the original developer."

The RBNZ also said that "for the avoidance of doubt", the new construction exemption applies to both owner occupiers and investors.

"Regardless of whether the borrower owns investment property, a loan that qualifies for the construction exemption can be exempted."

The RBNZs decision was in response to submissions suggesting such a change.

The existing LVR rules also include some exemptions for 'remedial' repair and improvement work on properties.

The RBNZ said it also acknowledged that standards for residential rental property had been increased around aspects of insulation. The remediation exemption therefore had been reworded slightly "to make it clear that this is within the scope of the exemption".

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Do we know how they are deciding who the "developer" is? In most local cases the "developer" is selling the land to the building companies who then on sell as house and land packages. The assumption is that this would not fit the exemption. Currently these building companies are responsible for a significant portion of the price inflation in new houses as they are effectively able to monopolise supply of land and hence make super natural profits. A local example of this is a $1.4m house and land package for a 260m house. Developer markets the land as $550K, in reality the land is pre sold to a builder who actually pays $380K. Builder then prices the land at $550K again, then is able to charge $850k for a house that should cost $650K to build. So profit (over and above normal building profit) is approx $370K. I will note that not all building companies will do this but there are certainly a few doing so.