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15 Sep 2016

Risks of Tighter Bank Lending for Property Market

The heated housing market in New Zealand has led to tighter lending rules, with the Reserve Bank set to introduce new loan-to-value ratio (LVR) restrictions from October 1. Under the new rules, property investors will require a 40 percent deposit for a mortgage loan, with owner-occupiers needing a 20 percent deposit. While tighter lending requirements were introduced for Auckland investors last year, new restrictions will be applied to all property loans across the country.

Even though LVR restrictions are designed to standardise the regime, a number of exemptions have been put in place. Exemptions include new builds, bridging finance, re-financing existing LVR loans, and funding non-routine extensive repairs due to things like natural disasters and weather tightness. Borrowers with owner-occupier and investor collateral can use the combined exemption to finance up to 60 percent of investment properties and 80 percent of the owner-occupied property.  

New lending restrictions are in direct response to rising house prices, with New Zealand recently recognised as the most heated property market in the world. In a global ranking of house price growth by estate agents Knight Frank, New Zealand came top with 11 percent annual growth. Canada was the only other country to see price growth over 10 percent, with the once-hot property markets of Taiwan, Hong Kong, and Singapore all seeing significant reductions in house price growth over the last 12 months.

Auckland is responsible for most of this growth, with the average house price recently peaking above NZ$1m. With immigration at record highs and housing supply unable to keep up, prices don't look like they're going down any time soon. Property investment in Auckland has boomed in recent years, from 37 percent in 2012 to almost 50 percent today according to figures from Core Logic. This has led to the lowest home ownership rates in 60 years, with average rent prices reaching over NZ$500 a week and accounting for 32 percent of average household income in Auckland.

Tighter lending standards are likely to have a significant impact on the Auckland market, with most banks having already tightened up in the past two or three months. The country's big four banks - ANZ, ASB, BNZ and Westpac - will continue to restrict lending due to worries about peaking prices and increased exposure.

Responses to the changes have not all been positive, with Property Council chief executive Connal Townsend saying new restrictions could counteract the looser planning rules of the Unitary Plan, which is designed to bring 400,000 new homes to Auckland. "We want to make sure they don't throttle it off too much," said Townsend.

Due to concerns that new restrictions will have a negative impact on housing supply, the Reserve Bank will widen the scope of existing exemptions for new dwelling constructions. It will now be possible to borrow for a newly-built property that has been completed within the previous six months and is bought directly from the developer. If you're in the market for a home loan, it's important to speak with a professional mortgage broker in order to understand how these new lending restrictions will affect you.

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