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23 Jan 2020

LVR Restrictions Could Tighten

The New Zealand property market is showing new signs of life, as low interest rates and relatively relaxed loan-to-value ratio (LVR) limits work their magic across the country. Even Auckland's struggling market is finally back in the black, with Wellington and select regional markets forging ahead at great speed. While many people across the country are welcoming the new normal, according to ANZ, the Reserve Bank could tighten LVR restrictions if the market shows any real signs of taking off.

Like most things in the property market, LVR limits have been up and down over the years. As a significant way to influence market behaviour, LVR limits are designed to reduce low-deposit mortgage lending and its associated risk. The 'speed limit' was set at just 10% a few years ago for owner occupier loans, with limits raised to 40% for investors in 2016. This rather extreme tightening was mostly successful, with limits relaxed over the last two years to reach their current state.

Owner occupier loans now require a 20% deposit, with investor loans needing a larger 30% deposit due to the higher risks involved. In addition, banks and other investors must restrict their high LVR lending to 20% for owner occupier loans and 5% for investor loans. While the New Zealand property market has been in a bit of a slump over recent years, there are some signs that the market is waking up. If prices in Auckland start to show new signs of life, ANZ warn LVR restrictions could be tightened once more.  

According to ANZ economists' in their first Weekly Focus publication of 2020, the housing market has "got the bit between its teeth again. Around the nation, towns and cities are racing to set new records for the unaffordability of housing. Auckland annual house price inflation is back in the black (just), with very limited listings providing the price impetus." Housing affordability has become a major issue once again, with listings low, demand high, and rental prices rising in Wellington and many regional centres.   

While everyone wants to see a healthy property market, ANZ economists are concerned about unsustainable conditions in a country not yet ready for growth: "On the downside, it’s not the sort of growth we need. Household debt is already very high, housing affordability is already a significant economic and social problem, and house price rises further exacerbates wealth inequality. If things really start to get silly, the RBNZ has the option of tightening up LVR restrictions once more. We wouldn’t rule it out."

With LVR limits carefully relaxed over the last two years, the RBNZ will not tighten them lightly. Lots of other issues will need to be carefully analysed first, with ANZ economists mentioning credit availability, business sentiment activity indicators, and the details of the Government’s infrastructure spend-up. Resource stretch and inflation pressure indicators will also have an effect on future decisions, as the New Zealand economy continues to navigate rough international waters and the average Kiwi homeowner works out how much they can really afford.