The amount of equity borrowers have in their homes has increased significantly since LVRs were introduced

People taking out mortgages to buy a home have become less vulnerable to the effects of a housing market bust, higher interest rates and a loss of income since the introduction of Loan to Valuation Ratio (LVR)  lending restrictions, according a study by the Reserve Bank.

The report found that prior to the introduction of LVRs in October 2013, the average new mortgage was for 67% of a property's value.

But by mid-2016 the average LVR had fallen to 55%.

That excludes lending to investors but includes lending to first home buyers and those moving up the property ladder.

Over the same period, the amount of money provided to home buyers where the amount borrowed was above 80% of a property's s value declined from more than 80% of new mortgage lending to 35%.

"This suggests a substantial increase in average equity buffers, driven by a widening gap between median mortgage debt and median house prices," the report said.

This had benefits for both borrowers and the banks that were lending them the money, it said.

Prior to the introduction of LVRs the Reserve Bank was concerned about the risks faced by banks if there was a sharp downward correction in house prices, a decline in household income or an increase in interest rates.

There was the possibility that high LVRs could magnify the extent of a house price boom and any bust which followed it.

"An increase in interest rates for highly leveraged households, or a decline in their incomes, makes it harder for them to service their mortgages and leaves less income available for consumption," the report said.

"Highly stressed mortgagors might choose to sell their houses to repay their debts, which pushes house prices down further and lowers the perceived wealth of other homeowners.

"Such scenarios can have a large impact on the economy as a whole," the report said.

However the increased levels of equity that people had in their homes since LVRs were introduced should have reduced those risks.

"Households with lower equity buffers have a more limited safety net against a variety of risks," the report noted.

"In the event of a decline in income or an increase in interest rates, households with lower LVRs have higher flexibility to restructure or refinance their mortgages.

"Households with lower LVRs are also more likely to maintain positive equity in the event of a decline in house prices."

However the report also noted that the introduction of LVRs probably wasn't the only reason for the increase in new borrowers' equity.

"Rising property values would likely have increased the average equity of movers even if the [LVR] policy was not in place," it said.

Here's the full report:

 PDF iconMortgagorDebtRBNZ.pdf

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80 Comments

Celebrating equity in today's market is like admiring how much air is in the biggest balloon of all time. Unbanked paper equity easily here today, gone tomorrow. I'd suggest postponing the celebrations, pending existing borrowers ability to service existing debt in the midst of tough times ahead, is known. Then let's see how much equity is left to celebrate about.

What a mean-spirited thing to say. These owners worked reaaaallly hard for their equity. Really hard.

Really? Paying down a mortgage by hard work and sheer discipline has to be admired - yes. Having it gifted to you as a result of the greed of speculator/Landlords, then taken away, what's it called then - theft? It's a buyer beware world we live in. Patience is always key in times of over exuberant behavior of boasting property hares.

RP has it exactly right. Except to the extent this increase in equity since 2013 is a result of paying down debt this equity instead represents the effect of increased mortgage credit in the market generally. If it’s new debt taken on in 2013 the debt prinicipal repayments since then assuming at least a 25 year mortgage will have been small. This equity represents the credit bubble that has blown ever bigger since 2013. If the general level of mortgage credit falls so will this equity. I agree with RP, if this equity merely reflects the general credit bubble it is no better than admiring the contents of a balloon

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I think we need a big flashing red tag for sarcasm.. some seem to have fallen into the sarchasm.

Oh....although in defence some property investors comments are so outlandish that Poe’s law applies

I can't argue with that. I sometimes wonder if some of the posters on here (on both/all sides) would actually express the opinions they express in here down at the local pub where the possible replies might be a bit more physical than a harshly worded reply.

Time and place Pragmatist?

My dad could beat up your dad.

Time to grow a pair and stop having your daddy fight your battles. Better to die on your feet than live on your knees.

You have to wonder if their ignorance is contrived and that the feeding of this propaganda is just the norm for dealing with the average Joe out there.

When it falls apart they will all innocently stand up and tell us how they cant understand how it happened and that all the numbers seemed to add up.......

Are you always so optimistic rhetoric-poppy? How do your family maintain their composure and what's it like to live with such an optimist as yourself? I think the real problem here is you missed the boat and now you sit in the man-cave sharpening your implement, your axe.

Hiya Johnny! having just hopped in a boat taking on water yourself, am all ears with your exit strategy....

you haven't a clue haha

Houseworks, maybe, maybe not. It's so easy for a "Johnny" to label the facilitators of such warnings as party killers, DGM's or even crackpots at the height of a credit bubble.

The difference between you and I is, my investments have already paid off years ago, I knew when it was time to exit and sit pat on my as labelled "measly" term deposit returns. I'd suggest for your own family's sake, don't dismiss the warning signs. This is the real deal.

The way I see it - everyone has their own risk tolerance. Yours is obviously much lower than the property investors. Neither of you can predict the future, so it's kind of pointless bickering about whose strategy is worse.

saving_for_auss, fair point :). In the last couple of years my tolerance for risk has reduced considerably! Others wear different glasses.

Which I think is fairly natural for someone in retirement. People with gold cards shouldn't have mortgages..

saving_for_auss, I'm a 53 year old who decided one day to leave a job vacancy for someone else to fill :)
No Gold Cards here.

53 years old, retired, debt free, and not having to run around playing landlord? You are killing it. Well done on taking advantage of good economic times.

The difference between you and I is, my investments have already paid off years ago

The difference between you and I is my investments have paid off BIG TIME haha now I have the rest of my life to enjoy it to spend it and to give it away haha

Houseworks, in one year, you've indeed profited handsomely out of just one two bedroom unit in Hamilton, I stand humbly corrected. Yes indeed, it's now time to put your feet up...........:-Q

That's ok I don't care if you make up a mis-portrayal for your own sad reasons. Property is still the most favoured investment type .....:-Q

Speaking of that, where's the REINZ report this month?

Reinz info out 9.30 tomorrow last time I checked☺

Tomorrow morning for REINZ.

Thanking you!

Let's turn a fairly positive news story into a negative one.one loves to be negative!!!

If you eliminate the sunshine and lollypops the comments aren't negative, just more realistic.

Well that's the best case scenario - a 'soft landing' so that house prices back in line with incomes without scores of specuvestors declaring bankruptcy.

A soft landing as you describe would literally take decades, the likelihood of this occurring seems pretty close to zero

Particularly as the sellers are incentivised to be first (as the housep rice will drop the longer they wait) to market.

You could well be right. What I'm noticing is a lot of small town, low-priced rental properties without floor/ceiling insulation being sold off before the deadline. They're still asking for a premium, I wonder if there will be any takers.

DP

So the policy is working. Why are we considering changing LVRs? It is frustrating with articles like ‘LVRs helping first home buyers’ and ‘LVRs lower systemic risk’, we have politicians advocating for and pressuring the Reserve Bank soften the rules.

Yep long term I don't think anyone would lose by keeping the LVRs in place except for some Aussie banks

Well that does it then. We cannot have the Aussie Banks missing out on one dime of potential profit. Certainly not with our glorious former Prime Minister chairing the biggest one. He promised a better future for Aussie Banks and we will move heaven and earth to make that happen.

Mort-gage....derived from "death pledge"

RBNZ have been working on this report (probably taken them 18 months in between, coffee, elevenses, lunch, donuts and tea) and still I find it lacking in gravitas. They know all the houses to sell in the last 12 months (individual property details) and banks can confirm the mortgage amount (Its also registered are LINZ) why can't we have a proper report on the state of current lending.. It's not difficult

All debt must be serviced and that requires having enough income to either make payments, or increased payments. In a shock involving increased interest rates if people lose their job or end up moving to a lower paying job (this happens with contractors) people can end up struggling to pay or have to cut discretionary spending.

Reducing the number of overleveraged properties is good but not having enough cash buffer or diverse income to ride out a recession is not great either. Who could say with confidence that we could ride out a GFC style collapse in Australia or New Zealand? Note that US household debt to GDP is half that of NZ households, same in Australia (but worse).

As the report says, the LVR has helped the banks balance sheets, which is what this is all about, - not so much for the benefit of the borrower.

After all, where do you think these home buyers 'magic' up the extra deposit. In many cases it is from the bank of Mum and Dad, or Kiwi saver etc., or secondary finance companies. If secondary borrowed funds, then needs to paid back. If from Mum and Dad or Kiwi saver, all they have done is taken tomorrows funds to use today. And when tomorrow rolls around, the kitty will be empty.

The banks are better off, but the home buyer could be in a no better or worse position than before. They could have just moved their Kiwi saver money from a nice safe account into house 'equity' that could quickly disappear.

FHBs your mortgage amount shouldn't be over $300k. Don't follow some of the silly billy Gen-Y youngsters who mortgaged up to the hilt. I know of someone who is in his early 20's who has a $900k mortgage for his first home.

Nice bit of banking that!

$38,250 in interest each year.. I presume they've gone interest only to start them off .a bit cheaper (extend the terms of servitude)

Most religous man in Auckland that guy.. on his knees praying that the REINZ report says median prices up Y/Y every single month for the next 5 years or more. Also praying RBNZ leaves the OCR alone every time.

His deposit @ 20% is more than my entire mortgage.

You can see why the Doom and gloom merchants have missed the boat with their negative attitudes.
Jealousy that other people have achieved s better financial position than yourself will eat away at you!
Doomers god help your partners having to live with you when you have such a negative attitude and I bet they wish you were more proactive as they would be far better off!

You should have a more positive attitude. Seeing everything is great you should mortgage all of your properties to the hilt and buy more properties. If you do that you could afford a lambo just like the guy in this video.
https://www.youtube.com/watch?v=0GIwTG8V-Ko&feature=youtu.be

Of course you should leverage to buy more property but only if the figures stack up and you are buying under true market value with upside.
A no brainer really, but the fact is that the ones that don’t take the opportunities when they present are always left behind and that is when we get the Doom and gloomers who want the market to crash!
ChCh is the place to be buying for returns and capital gains with all the development that is taking place.
The Man has spoken whether you take advice is up to you!

Risk analysis by way of financial modelling says it's time for me to deleverage. It's a low risk way to increase net worth. Given that net returns for non-property investments still exceed mortgage interest rates there's never been a better time.

No one wants the market to crash but much like any disaster it's best to have a plan in place and diversified financial assets to survive.

How do you buy under market value when what you pay is by definition market value. Unless you mean fundamental value in which case I would tell you that all property in NZ is massively overvalued compared to fundamentals.

Hardly, we always buy under true market value.
Property investors make their money when they buy, rather than waiting for capital gain over the years.
Yes it can be done and that is why property investing done correctly leaves equities for dead.

Doom and gloom merchants

People who want lower priced properties aren't doom and gloom merchants. People like you who want the property prices of cold, damp, noisy homes to be out of whack with peoples income are doom and gloom merchants. Look in the mirror.

Sorry to disappoint you but professional landlords do not own cold and damp rentals.
We always have our properties fully insulated as it just makes sense to maintain them and your rents are always maintained.
House prices may well be out of whack with,income in Auckland but ai reiterate that NZ is just not Auckland although many on here think it is, to their financial detriment!

LOL, so you're telling me you've either never purchased an older house as a rental, or you've gone round and relined them all after installing insulation in walls, ceiling and underfloor, and fitting thermal break double glazing on them all?

Pigs might fly, but that lie wont.

They are all insulated to at least the minimum requirement for the new insulation policy.
Many have got insulation in the walls but have never put insulation in the walls unless it was a exterior cladding alteration and dumb to double glaze if already single glazed.
All properties have at least one heat pump and some with Heatpumps and compliant fires.
Never had a single tenant complain about the lack of insulation or heating.

So many of your houses are not "fully insulated" as you said.

The median household income in NZ is 85k as of 2017. According to the International housing affordability survey, affordability in NZ could be defined by the following tiers:

Moderately unaffordable: $263,500+
Unaffordable: $348,500+
Severely unaffordable: $433,500+

Is a small double glazed, wall insulated, non draughty house in Christchurch less than $263,500?

YAY .. we have just discovered that Planet Earth is round .. and properties do appreciate .... lol

I actually had to check the name of the reporter twice when I finished reading this article.

So people who BOUGHT properties in the last 5 years have made some equity (money)?, shame on them! .... Oh, and can now upgrade into bigger and larger homes, shame shame! ..... While DGMs are standing on the shore, pissing in the wind, waiting for the Titanic to sink again ?... Good on them ...

RP and his like and supporters think that 50% equity will disappear one day ( maybe soon) and it only paper money .. The apocalypse is coming - for sure !...

While this nonsense continues, He is getting pissed off everytime he counts his TD cents and finds that they are worth less due to daily inflation. So he keeps coming back here and oozes out his venum.

Misery likes company, truly.

Penny for your thoughts Eco Bird, if you want to take this in good faith.

What makes you think that house prices can continue to be out of line with peoples income and rental prices for the foreseeable future? Those are two pretty big fundamentals that are really off in the NZ housing market.

I have some savings. If I was as optimistic as you I'd get myself on a 5 year mortgage for a 2 bedroom starter home shitbox. But I'm in a provincial centre, and my faith in the market here is weak based on what's already happening in Auckland. It's a hell of a risk for a working man without the bank of mum & dad behind him, don't you think?

I think you're in danger of overpaying..... a Penny for Ecobirds thoughts, are you sure?

Nic, its think first, pay later methodology. Unlikely money will ever change hands.

thank you for your sensible thoughts and attitude.

I shall throw in a penny of my own - it is not as simple as many DMGs want it to sound like - there is no one size fit all in the market.

Provincial NZ is indeed complicated as it depends where you are and the prospects of the centre you are living in - e.g. I would never buy a house in cities like Te kuiti, tokoroa, Kawerau and many others .. why buy when you can have the same home for much less cost as long as you like when there is no significant CG for decades?

Totally different case in major towns and cities like AKL, QT, even Palmy and HB let alone Ham and Tauranga. Where there is demand and growth there is appreciation and future.

Buying a house in growth areas is different from buying anything else as history shows that houses are almost the only real asset which appreciates in value with time ( Just like long term investment in shares) anything else depreciates with time. -- BTW that also applies down to the suburb you intend to buy in.

so when all the risk factors and fundamentals are right then you should not care too much about the term and the amount of your loan as long as you can service it.

If unsure and are saving hard, then invest you money in the financial market ( through many avenues) grow your dough ... we all did the same, most of us didn't have rich M&Ds and it did not fall from the sky ,, we made it happen - it takes time, learning, gutts, and knowledge and there is nothing left here to chance or stupidity as some loser like others to believe.

EcoB here's a new tool for you to work out the growth areas 2013 → 2018.
CoreLogic Smart Map Showcases NZ’s Latest Property Market Stats
CoreLogic has today released the ‘‘Mapping the Market’ report, a new interactive map of New Zealand’s property landscape which could ease pressure on people struggling to locate homes within their actual budget.
http://clnz.maps.arcgis.com/apps/MapJournal/index.html?appid=dcaa9830d56...

P.s. interesting to see them use the Mission Bay/Kohi/Postcode 1050 map on the main page - Ex Expat will be proud ^^

Cheers for that ... i only heard talking about this ..but this is great - thank you

Another useful site for the future.

www.grammarly.com

hi Eco Bird,/

By provincial center I mean somewhere in the 50k-150k people range. I wouldn't consider the likes of Tokoroa a provincial center, and somewhere like Hamilton I'd have to grudgingly call its own city now. I wonder if the capital gains could make up for the opportunity cost of remaining here for a criticial part of my career.

Sounds like you're not a die hard property spruiker, you're just saying people shouldn't sit on term deposits for the rest of their life. Which is reasonable advice Though I wonder at your vitriol directed towards RP - why shouldn't a retired 53 year old with a paid off home continue with low risk investments?

I would point out that repayment of outstanding debt is likely keeping a lid on CPI due to a lower level of disposable income and hence also allowed RBNZ to keep the OCR low which has likely inflated prices to some extent. Why would this matter? There are likely multiple ways in which LVR restrictions have increased equity, some part thereof may evaporate without these restrictions.

The figures are not surprising. NZ has a relatively low debt load compared to a decade previously as interest rates have halved over this period of time. Interest rates will not go back to 10% or even 7%, any rise in interest rates will trim disposable incomes enough to restrict spending and start a push to recession, necessitating rate cuts.

In 2009 I was advised by a prominent British (Scottish) financier who was advocating for mark to market accounting before the GFC (he was a childhood friend of a work colleague who I worked with in Aus, now in his early 70s. He was profiled in Time regarding his opinion, and the fact he was "hated" amongst the US/ UK financial community.) The advice was we had at least 20 years of abnormally low interest rates and they would continue to grind lower and to avoid the advice to fix rates. So given he has called everything to a tee, I will stick with his advice for the next 10 years.

Anyone who purchased a property in 2014 or earlier has a considerable amount of equity. Over this time mortgage rates have fallen, creating an equity and income buffer. Many mortgage holders, as fixed rates have expired and have re-fixed at a lower rate, will have taken the option to keep the repayment the same and increase the principal component of each repayment. So I would expect this upward movement in net equity percentage to continue as people sit pat and pay down their mortgages.

I would not purchase in Tauranga, Auckland and Queenstown, in that order. But, all that has happened in the last 10 years is the discount rate applied to asset valuation has reduced increasing asset prices. For example in our area in 2007 it cost 450K to purchase a standard 200sqm brick and tile house, at 10% interest rates the interest component with a 20% deposit was 36K per annum. This property would now cost 700K, assuming same 90K deposit, interest at 5% would only be 30.5K. Over this time (11 years) most peoples household incomes have increased. So property prices at these levels in our area are eminently affordable, and are under pinned to a degree, by the rising replacement cost.

Most areas of NZ are resilient to a crash as NZ is a desirable country to live in with an increasing population, with many localities being geographically restricted by terrain eg Wellington. The Wellington region at present has the lowest number of listings ever on trademe at 1439, previous low winter 2016 was 1453. I note there are 243 properties listed for sale on the Kapiti Coast, and over 20% are sections and house and land packages, this number was 950 during the GFC. We returned from Aus in early 2008, and Harcourts who did not list on trademe had over 200 listings alone. The numbers are tighter given the population rise over the last 10 years. There is limited supply of property for sale and rent. We own townhouses in Central Wellington CBD, and we have never had a property empty for more than 2 days (unless we reno or repaint). My wife conducts a rental open home and always has at least 10 applications and generally feels bad as people she liked miss out. Most of the time we simply have revolving tenants as the odd one moves out and find their own replacements The only change in the market is c**p roperties sit for a long time or don't sell, but any non problematic property sells within a few weeks or at at tender.

Geez, you typed all this crap, as though you have a crystal ball..

CB's have no clue how it's going to play out, but you seem to..

Are you related to TM2?

This came to mind when reading your reply to mja:

Coutesy of Buzz Lightyear: You are a sad, strange little man and you have my pity.

Mja has detailed facts, yet you call it ‘crap’. How about countering with your own facts that support your notion? So far it is seven plus years that you have believed that houses are overpriced. People who bought during that period have got on with their lives and as mja says, have a good equity and income buffer. Sorry it doesn’t suit your world view but thems the facts.

Birds of a feather eh...

As I've said you sad lot of misfits will do anything to keep the property ponzi afloat.. ,

Good luck.. but sad your hopes are to be dashed

Most areas of NZ are resilient to a crash as NZ is a desirable country to live in with an increasing population, with many localities being geographically restricted by terrain eg Wellington

I think you overstate its appeal. The bulk of our migrants are from developing countries and work low-wage jobs. Which is why our population grows so rapidly but our gdp per capita doesn't grow at all.

It’s all relative. A ‘low wage’ job to an immigrant may be riches beyond belief. Work in third world countries and you’ll see what I mean.

Right, but it's only a desirable place (to live, not visit) to people who are from seriously shitty countries, and who won't contribute much to the economy.

That's not a healthy sign.

I come from a "third world" country and could afford a 2 bedroom 2 bathroom brick and tile townhouse in a good neighbourhood for less than $100 000 (albeit not on a low wage salary). I'm earning more than double what I did there and can't afford a house in NZ. It's all relative.

They don't understand the concept of relative as they live in a fantasy world

Right, so if I was in your shoes I would be saving heavily because my money would be worth so much more back home. That's the rational path for you to take. What's not rational is for you to put an over-leveraged deposit on a 3/4 million auckland mouldbox - which is what the property bulls are suggesting will continue to happen.

NZ is my home now.

The amount of equity borrowers have in their homes has increased significantly since LVRs were introduced

Is it related though?

Pretty much everyone I know is pouring money into the house for the sole reason of reducing interest costs.

The teaser headline reads " Mortgage borrowers better able to withstand financial shocks ",

Quite apart from my skepticism , I would like to know what would happen to the household whose Mortgage repayment was $600 a week at 4,99% and suddenly went to $900 a week due to a 2,5% OCR increase.

One could argue - this will never happen .

Never say never

If in 2007 you stood up and said there would be a global financial crisis that would see more than half of America's Investment Banks collapse , you would likely have said ........... this would never happen .

18 Months later it did

We need to be aware that the debt risks in the global financial system are overwhelming , even greater than 2007/8 and very worrying for those who even have the vaguest understanding of economics.

Whats going on right now sends my head spinning , and is contrary to everything I ever learnt while studying economics 30 - something years ago