End to LVRs might lift prices
There may be a surge in the housing market when the Reserve Bank removes speed limits on low deposit home loans, market watchers say.
Some say the LVR (loan to value ratio) restrictions imposed last October had clearly slowed the housing market, acting as a "circuit breaker," and removing them could throw fuel on the fire of property prices.
Others said changes such as rising interest rates and the need for banks to hold more capital may have been just as important, so the LVR experiment was not a clear victory.
The Reserve Bank is due to issue its latest Financial Stability Report tomorrow. That is expected to set out the roadmap for dropping LVR loan restrictions next year or they may be eased from the 10 per cent threshold, allowing more borrowing, especially to first home buyers.
Reserve Bank governor Graeme Wheeler recently said the high LVR restrictions would be removed once housing market pressures "moderated" and they were confident there would not be a rebound in house price inflation.
Past academic research on similar schemes in other parts of the developed world found the rules had not worked to control house prices, but that was before the New Zealand experiment.
A senior Wellington source said: "I don't know if they have worked or not (in New Zealand). It would be very interesting to find out."
The source said though he would not have brought in LVR restrictions, the Reserve Bank was justified in doing so because there was potentially an issue with low deposit loans going up to 30 per cent of lending.
Asked if house prices would rise once LVR restrictions were removed, the source said that was "possible" especially at the lower end of the market.
"If there was a surge (in the market) then you could say they (LVRs) have been effective," the source said. "If there wasn't a surge, they were not effective."
The LVRs were imposed because of concerns about financial stability if there were a house price crash.
But the source said New Zealand banks were well capitalised. Most home loans actually have quite low loan to value ratios as people paid off their loans over time.
It was hard to say house prices were well out of whack given the shortage of supply in key markets like Auckland and Christchurch, and record migration levels.
"Maybe they are not too expensive, and people do keep buying them," the source said.
BNZ head of research Stephen Toplis said the LVR restrictions had certainly worked, though what happened next was unclear.
"There is no doubt it had a [substantial] impact," he said. "It was a circuit breaker."
While the limits had kept some first-home buyers out of the market, "it also protected the most vulnerable" from borrowing too much money.
The LVR restrictions were a "bit of a punt" but they had worked.
As much as anything, they changed behaviour because first-home buyers were simply not asking for loans, believing they would not get one without a 20 per cent deposit.
Banks also cut back on the supply of lending to people with smaller deposits, to get their own books in order.
But the big unanswered question was what would happen when the limits were lifted.
Toplis said "my gut feel is that if you removed restrictions you would see a pickup in demand".
"It will provide a bit more fuel on the fire of the housing market, if it happens. But we may have to just give it a nudge and see [what happens]."
Massey University banking expert David Tripe said he expected a "burst of activity" from first home buyers when the LVR restrictions were lifted.
But the banks would still be cautious about the risk of lending to first home buyers with small deposits.
- The Dominion Post