The Reserve Bank of New Zealand is unlikely to ease current loan-to-value ratio restrictions that require investors to cough up a minimum deposit of 40 per cent, CoreLogic New Zealand’s Chief Property Economist Kelvin Davidson says.
Loan-to-value ratio (LVR) restrictions were reintroduced into the New Zealand market in March 2021 and then tightened in an effort by the RBNZ to “help dampen the post-Covid buying frenzy and curb any looming financial stability risks”, Mr Davidson said.
The current requirements restrict the number of loans that can be made to low-deposit borrowers.
Investors typically require a 40 per cent deposit while owner-occupiers need a 20 per cent deposit (with the exception of new-build purchases).
While the RBNZ may eventually loosen these restrictions to allow for a larger proportion of borrowers to take out low-deposit loans, current market conditions meant this wasn’t imminent.
“Most importantly, the current housing downturn isn’t triggering major financial stability risks
(such as widespread mortgagee sales) – and technically those would have to be apparent before looser lending rules would start to be pondered by the RBNZ,” Mr Davidson said.
Wrong time to loosen borrowing restrictions
Loosening New Zealand’s borrowing restrictions while property prices were falling could also be problematic, he said.
“Indeed, in a falling housing market, looser LVRs might actually create their own risks,
(for example) greater chance of negative equity if people only require small deposits,” Mr Davidson said.
“Similarly, looser LVRs at the same time as the RBNZ is trying to cool the economy and
inflation with a higher official cash rate seems counter-productive.”
It was unclear that any change in LVRs would soften the blow of price declines, Mr Davidson said.
“… Even if LVRs were loosened in the near term, borrowers may not come flooding back (given low
consumer confidence at present and higher interest rates), while banks would probably stay
pretty cautious too,” he said.
“After all, even with the speed limit for low-deposit owner-occupier lending currently sitting at 10 per cent, the actual figure in November for these loans was four per cent.”
New Zealand borrowing restrictions may ease in March 2024, though RBNZ plans to impose new debt-to-income ratios at the same time could nullify any real world impact this will have.
“Although I think the probability that LVRs will be loosened this year is low, there’s a reasonable
chance we’ll see a shift if/when formal caps on debt-to-income (DTI) ratios are imposed from around
March 2024,” Mr Davidson said.
“In other words, giving with one hand and taking with another in early 2024.”
Values slide in 2022
Values in New Zealand have already declined by about 10 per cent from their peak, and could potentially fall another 10 per cent in 2023, according to CoreLogic’s most recent Best of the Best report.
For the 2022 calendar year, total sales volumes were around 67,000, the lowest since 2010, and the third lowest figure in the past three decades.
The highest 12-month change in median value was in Reefton, a small town on the west coast of the South Island which saw median values increase by 25.7 per cent.
The lowest 12-month change in median values was in Normandale, a suburb of Lower Hutt, which saw declines of 20.3 per cent.