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Will the new Government relax lending restrictions?

Tags: Residential

It took little under a month between election and result, but New Zealand has a new Government set to shake things up.


Despite some policy yet to be confirmed, both Labour and New Zealand First have flagged reforms to the Reserve Bank of New Zealand (RBNZ) and it’s processes, says Bayleys national residential and auction manager Daniel Coulson.

Set against softer sale volumes, calls to relax the RBNZ’s lending restrictions have garnered support from the public, so we’re asking the question – is it time to review LVR restrictions?

FOUR YEARS AGO

Initially a temporary measure to curb activity in the investment sector, LVR restrictions have been in place for more than four years. It was back in August 2013 that the RBNZ announced a 10 percent ‘speed limit’ which would restrict mortgage lending for buyers with deposits of less than 20 percent.

“Designed to relieve inflationary pressure and guard against a sudden drop in house prices, the first bout of LVR restrictions saw a short dip in investment activity, however value gains continued and activity rebounded again six months later,” says Bayleys managing director Mike Bayley.

In October 2015, the RBNZ again sought to tighten lending criteria, requiring property investors in Auckland to have a deposit no less than 30 percent, while lending ruled were relaxed elsewhere across the country. Deemed largely unsuccessful, these changes inflated ‘Auckland’s housing boom’ to ‘New Zealand’s housing boom’.

The last and most significant tweak to these rules formally actioned in October 2016 requires investors to have a 40 percent deposit in order to purchase residential property nationwide. Finally securing the result which the RBNZ was hoping for, these regulations have had a significant effect on the local housing landscape, with investor-activity still comparatively low 12-months later.

HOW HAVE INVESTORS REACTED?

In the recently released ‘ANZ Property Investment Survey’ which measured online responses from some 784 residential property investors across the country, 47 percent of the respondents claimed that LVR’s are their biggest regulatory concern.

However while respondents stated that the most recent amendments to the regulations had ‘severely impacted’ their investment strategy, 70 percent of those surveyed said that they would indeed invest in residential property again.

MORE THAN MEETS THE EYE

While many have been all-too-eager to pin slowing sales activity squarely on the RBNZ and its macro-prudential tools, it is vital that we acknowledge the wider economic factors at play here, Bayley says.

“Tightened lending regulations might play a role in subdued investor activity, however there are many other factors which continue to influence the decision to purchase.”

“The combination of uncertain Government policy, availability of credit and rising interest rates show that there is no miracle cure for the current market conditions,” he adds.

“Financial institutions have moved toward greater conservatism in the face of volatile global markets, and this has filtered down, meaning that fewer residential developments are meeting requirements for finance.

“With less homes being built, the local Governments are falling short of housing targets, exacerbating shortages and causing sellers to hesitate for fear of offering their home to market without being able to find another,” Bayley explains.

Despite this cycle seemingly on repeat, all eyes are on Labour and the success if its ‘Kiwibuild’ initiative, which looks as though it will gain traction adding 100,000 homes to the market over the coming 10 years. The target, while ambitious, may alleviate some of the demand pressures on the domestic housing market, suggesting less need for financial mechanisms like LVR’s.

LVR’S STILL NECESSARY SAYS RBNZ

Motivated in their approach that the LVR restrictions are now just as integral as ever to improve New Zealand’s financial stability and resilience, the RBNZ has fired back at calls to drop LVR restrictions, stressing their temporary nature and standing firm on the stance that the domestic property market is not clear of housing pressures.

“While the Official Cash Rate (OCR) remains at an all-time low of 1.75 percent, the economy buoyant and interest rates still comparatively low, there is a feeling that changes are afoot, which explains the reason the RBNZ is proceeding with a conservative approach to lending,” Bayley says.

Now that the proposed Capital Gains Tax (CGT) is off the table until at least 2021 and deputy Prime Minister Winston Peters focused on slowing migration and foreign ownership of New Zealand property, we expect to see a short sharp increase of activity before the year end as sellers look to leverage off the relative certainty current economic policy offers.

Despite Peters’ being very vocal about his desire to reform the Reserve Bank Act, giving it greater power in relation to forecasting and currency intervention, both he and Prime Minister Jacinda Ardern have indicated that LVR restrictions will remain the domain of the RBNZ for the forseeable future.

A JOB WELL DONE?

With a proportion of first home buyers re-entering the market now that the new Government has been finalised and investor-activity flattening, it appears that the LVR restrictions have achieved the short-term goal of reigning in the rampant growth of a runaway housing market.

“LVR restrictions have adversely affected the tier of the market we’re trying to protect,” Bayley says.

“Outer Auckland suburbs and provincial cities which have traditionally been the domain of entry-level to middle-income families are where first-home buyers have borne the brunt of new regulations,” he adds.

It appears that the RBNZ’s ultimate intention - to mitigate risks to the New Zealand economy prevails, with enough housing pressures lurking beneath the surface to warrant their continued use, at least for the foreseeable future.

However, under the new Government, changes to rebalance the current demand/supply equation are likely and so now, more than ever we say the time has come to reassess the mechanisms and extent of LVR controls.

While this isn’t likely to occur in the short term, revisiting LVR restrictions should be a medium-term goal for current and future policy-makers - before more Kiwi’s are overregulated out of future homes.

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