[ad_1]
Loan-to-value restrictions appear to be returning, but the Reserve Bank’s signaling of its intentions could provide more fuel to the real estate market fire during the summer months, experts say.
In an announcement Wednesday, the Reserve Bank said that, starting next month, it plans to begin consulting on reinstating loan-to-value (LVR) restrictions on subprime mortgages.
In May, the Reserve Bank removed the LVRs that were in place to ensure that credit could flow and that they did not have an undue impact on the Covid-19-driven mortgage deferral scheme.
THINGS
Here’s how to get over your mortgage.
But with the housing market booming today, there has been growing speculation that the Reserve Bank could reintroduce them.
READ MORE:
* How Much Debt is Too Much for Kiwi Households?
* Reserve Bank ‘surprised’ by house prices: economist
* The family with the lowest mortgage rate in New Zealand
Those theories were confirmed Wednesday, and Reserve Bank Deputy Governor Geoff Bascand said the bank is seeing rapid growth in loans to riskier investors.
If the LVRs return, they will take effect on March 1. However, what form they will take is unknown.
While the development came as no surprise to most, some say the fact that there will be no changes until next year is a mistake.
Supplied
Economist Tony Alexander says the Reserve Bank should have made a decision on how to reset LVRs and did so immediately.
Economist Tony Alexander says the Reserve Bank seems to have forgotten the lesson that with monetary policy greater effectiveness comes from shock announcements.
“With today’s call, they have basically signaled to anyone who buys a property that they should do so before March rolls around and the LVRs are reapplied.
“In doing so, they have ensured that the boom we have been seeing in the housing market recently will continue throughout the summer.”
Alexander said the Reserve Bank should have made a decision on how to reset LVRs and did so immediately.
“Their primary responsibility is financial stability, and we are seeing an increase in low-deposit lending, and more for investors than first-time home buyers.”
Their latest joint survey with the Real Estate Institute shows that there has been a slow increase in the number of investors in the market, with a huge jump over the last month.
KITCHEN / ROBERT THINGS
The Governor of the Reserve Bank, Adrian Orr.
Of the realtors surveyed, 59 percent saw more investors this month. That’s an increase of 38 percent in October and 16 percent in June.
At the same time, Alexander’s latest survey of spending plans suggests early home buyers are pulling away from the market.
“It is the investors who are in control now,” Alexander said. “And the Reserve Bank just said that if you are an investor looking to buy, you should do so now before we put the LVR brakes back on.”
Mortgage adviser Campbell Hastie of Go2Guys agreed that investors were again a force in the market. His clients used to be primarily first-time home buyers, but now half were investors.
He said that if LVRs were reintroduced, the Reserve Bank should apply them to people buying a second property, not the first.
“It is more difficult for first time home buyers to obtain loans than it is for people who buy rental properties,” Hastie said.
“The services and income tests are much more rigorous for a first-time home buyer with a 10% deposit and no equity than for someone with a 20% deposit and lots of equity.”
New Zealand house prices continue to rise.
For that reason, if the Reserve Bank simply applied LVR across the board, it would not be fair to early home buyers, particularly in Auckland, Hastie said.
“As someone who invests myself, I think it should be more difficult for someone to buy a second property than for someone to buy the first.”
Such is the heat in the market right now, there are also questions about how much of an impact the LVR reapplication will actually have.
Mortgage Supply Company director David Windler said that if the Reserve Bank wanted LVRs to reign in the booming market, it would have to reapply them at the toughest level.
That would mean returning LVRs to the configuration originally introduced in 2016, which required investors to have a 40 percent deposit for a mortgage.
“If the Reserve Bank takes the middle ground and returns LVRs to where they were before they were lifted in response to the Covid-19 crisis, they may not have much of an effect,” Windler said.
“Right now, we have a moderate credit environment: banks are quite strict with their loans and many have pre-Covid criteria. We are not operating in a high credit environment.
“Despite that, the market is very hot at the moment, in large part because there is such a shortage of stocks, while people look to property as a safe asset with better returns than other options.”
This situation made it understandable that the Reserve Bank might seek to apply measures to calm the market, but it was also the reason why a soft reintroduction of LVRs could have limited impact, Windler said.
“But the current situation is widening the gap between those who ‘have’ and those who ‘have not’ and that is a social concern.
“So if the Reserve Bank re-applies LVRs, it would be reasonable for them to put a hand brake on investors and leave early home buyers alone.”
