At the end of April 2020, the Reserve Bank announced the removal of LVR restrictions on New Zealand banks. The move was designed to stimulate the economy following the wide-spread financial effects of COVID-19 and the Alert Level 4 lockdown.
In light of the housing market fairing well through the pandemic (thriving in fact), the Reserve Bank reinstated the LVR restrictions from 1 March 2021 to help cool a red-hot housing market.
From 1 March 2021, the loan-to-value restrictions that banks have to meet when lending to property investors moved to a maximum of 70%, meaning they had to have a deposit of at least 30% of the value of the investment property. And from 1 May, the maximum LVR restriction moves to 60%, so investors will need to have a deposit of at least 40%.
Since 1 March 2021, banks have only been able to lend owner-occupiers (namely first home buyers) up to a maximum of 80% of the value of the house they are looking to purchase, meaning they need to have a deposit of at least 20% of the purchase price.
The reintroduction of the LVR restrictions is designed in the most part to take some of the buying power away from the property investors and put it back in the hands of the owner-occupiers, and the first home buyers in particular. Without LVR restrictions, more property investors could make more purchases, driving prices to record highs and shutting many owner-occupiers out of the market, or at least out of buying a certain level of house.
From 1 May, property investors will have to raise a 40% deposit, which is a sizeable chunk — especially for lower level investors looking to purchase a sole rental property to form their passive income in retirement.
We think the LVR restrictions will likely reduce the level of investor demand in coming months and may see portfolio-level investors having to sell off their less efficient properties to free up capital to raise a deposit for a more efficient investment property or properties.
Another avenue property investors may venture down with the LVR restrictions back in place is looking into more expensive mortgages from non-bank lenders, as the LVR rules don’t apply to them.
First home buyers and owner-occupiers in general will potentially be less affected by the return of the LVR restrictions, as they are inherently hindered by record high house prices in any case, so raising a deposit of any size can be a struggle.
That said, if the LVR restrictions do succeed in cooling the prices and reducing investor activity, owner-occupiers may have a better hope at getting on the ladder.
It’s important to note that the reinstated LVR restrictions for own-home buyers mean banks can allocate up to 20% of their new lending to buyers with deposits of less than 20% — so, purchasing with a smaller deposit is still possible — very good news for first home buyers.
Get in touch with us if you’re a property investor interested in making changes to your portfolio, or enlisting value for money property management services. We can advise you further around what the market is doing now, and can connect you with who really know their stuff.