Reserve Bank tightens rules on property investors

RNZ
The Government will announce initiatives designed to cool the property market and help first home buyers. (First published February 2, 2021)

Loan-to-value restrictions, which limit the amount of low-deposit mortgage lending banks can do, will be tightened to restrict the flow of money to property investors this year, the Reserve Bank says.

The restrictions were lifted in April 2020, so as not to stifle a housing market that was expected to suffer a significant slowdown because of Covid-19.

But that has not happened, and instead house prices have shot ahead and investor activity increased.

“In part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace,” said Reserve Bank deputy governor and general manager of financial stability Geoff Bascand.

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“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.

The Reserve Bank is worried about highly leveraged buyers.
Maarten Holl/Stuff
The Reserve Bank is worried about highly leveraged buyers.

“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn.”

He said the risks were now higher than in December when the central bank had consulted on the return of the loan-to-value rules (LVRs).

Then, it had indicated that they would return at the previous level, allowing 20 per cent of new lending to owner-occupiers with deposits of less than 20 per cent and 5 per cent of new lending to investors with equity or deposits of less than 30 per cent.

Bascand said while the limits would return at that level on March 1, from May, investors would require a 40 per cent deposit or equity, and banks should implement that “immediately”.

That is a level already being requested by some of the major banks, including ANZ and ASB.

It is not the first time 40 per cent has been required of investors. Loan-to-value restrictions were moved to that level in 2016.

Economist Gareth Kiernan, of Infometrics, said that at that point the proportion of new mortgage lending to investors dropped from 34.1 per cent in the three months to July 2016, to 23.6 per cent in the three months to December 2016. The proportion of low-deposit lending being done dropped from 16.8 per cent of new loans to 8.2 per cent.

Annual house sales dropped from 93,708 in July 2016 to 75,174 by the end of 2017 and house price inflation slowed from 15.2 per cent per year in July 2016 to 3.7 per cent by the end of 2017.

“So there was a significant effect on the market over the following six to 18 months, one that was larger and more sustained than the effects from any of the previous LVR changes.

“I would argue that an LVR requirement for investors of more than 30 per cent starts to become a binding constraint on their purchasing ability, whereas anything up to and including 30 per cent deposit requirement seems to leave enough room for most investors to continue looking to purchase property.

“The question about Reserve Bank policy now is how much they are considering their actions from a financial stability point of view, and wanting to make sure the banks are financially robust, versus how much they are trying to slow the housing market specifically because of the public and political pressures to be seen to be taking action.”