LVR restrictions

July 16th, 2013 at 11:00 am by David Farrar

Stuff reports:

The is expected to forge ahead with controversial restrictions on home loans within the week – and there will be no exceptions for first home-buyers.

A banking source said banks were told on Friday to prepare for restrictions which will impose a 12 per cent ”speed limit” on their total new lending going on low equity mortgages.

That will effectively halve the amount of high loan-to-value (LVR) lending that the banks are currently doing, making it much harder to get a mortgage with a deposit of less than 20 per cent.

The source said the Reserve Bank’s restrictions were much more extreme than had been anticipated.

”My understanding is that all the efforts of Government to slow them down on the decision have not been successful,” they said.

Prime Minister John Key had previously suggested the Government would work with the central bank to agree on some sort of ”carve-out” for first-home buyers.

The source said tensions between the two parties had grown as Reserve Bank governor Graeme Wheeler refused to back down.

The Reserve Bank has consistently said that creating exceptions for first-home buyers, small business owners or others, would dilute the strength of the tool.

As an independent organisation, the Reserve Bank’s sole focus is maintaining financial stability in the banking system.

This policy, like most, will create winners and losers.

It should reduce pressure on house prices, as demand will drop following less credit being available. This will benefit those wanting to buy a home that can get credit.

The losers will be those who will be unable to get a mortgage as they don’t have enough of a deposit, and they will have to remain renting for longer. Also current owners could be seen to be losers as their houses won’t appreciate so much.

LVR limits have been widely criticised by the banking and brokerage industries, who have a vested interest in unfettered lending, as well as independent groups like Consumer NZ.

Even the Reserve Bank has admitted that people are likely to sneak around the rules by borrowing a deposit from family, or lower-tier lenders.

Once the limits are imposed, banks will cherry-pick borrowers with the best credit ratings, saving histories and account conduct.

If the reserve Bank does go ahead, it will be interesting to see how effective the policy is.

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46 Responses to “LVR restrictions”

  1. daveski (87 comments) says:

    Indeed, it certainly makes it tougher for those looking to purchase a first home.

    It does bemuse me that a policy is imposed for all of NZ when the problem exists in specific geographic regions.

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  2. smttc (752 comments) says:

    The Reserve Bank has no business doing this. Leave the fuckin’ housing market alone.

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  3. wreck1080 (3,906 comments) says:

    I think this is a mistake.

    I don’t know why they didn’t impose restrictions on foreign buyers first.

    So, the government is going to reduce the prices of houses in places like Tauranga and provinces where prices are already well below the 2007 peak.

    At least they could have defined a geographical application to the rule –eg, based on rating authority.

    But, the whole thing is the wrong way to address a supply issue.

    Reducing council fees and red tape would help for a start. It todays rules existed 150 years ago, Auckland wouldn’t have been built.

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  4. Zebulon (114 comments) says:

    It won’t harm foreign buyers, and it probably won’t harm property investors who can leverage off their other properties – just the battlers trying to get into their first homes. When will the government decide that its own people are worthy of protection and impose restrictions on property purchases by foreigners?

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  5. MT_Tinman (3,184 comments) says:

    Once the limits are imposed, banks will cherry-pick borrowers with the best credit ratings, saving histories and account conduct.

    Isn’t that exactly what investors (most of us at some time) expect banks to do?

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  6. smttc (752 comments) says:

    Wreck1080, this has nothing to do with the supply issue. It is simply the RB in its infinite wisdom trying to tell the rest of us how much equity we should have in our homes. Fuck off and mind your own business I say. If the banks are stupid enough to chase all and any potential lending that comes along then be it on their heads.

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  7. All_on_Red (1,582 comments) says:

    Wrong solution. They should do what happens in the US. That is you cant cross collateralise the existing equity in your own home to buy a rental investment. That should slow investors down a lot. Make each one standalone and you have to save to buy a rental. Many buy renters by 100% financing them using their house.

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  8. duggledog (1,555 comments) says:

    I’m fine with this. Too many people I know / knew have gotten themselves into serious trouble by borrowing too much. Hey presto, money worries, disagreement, can’t pay the bills and then it’s off for a divorce.

    There seems to be this modern shame of being perceived as being ‘poor’, which is how most young couples start out! (Unless your parents are loaded) So the fools leverage themselves to the max to get a house somewhere nice with the new Volvo instead of buying a two bedroom shitter and doing it up in the weekends whilst taking buses and maybe having a cheap old Corolla to get about in.

    If the level of financial common sense is too low then maybe it’s a good thing to save people from themselves.

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  9. lastmanstanding (1,293 comments) says:

    Meanwhile Auckland house prices will continue to soar and soar. Reason More buyers than sellers equal demand greater than supply and no chance of increasing supply in the short or even medium term with all the house building activity centred on rebuilding CCH.

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  10. burt (8,269 comments) says:

    Clearly we need a Labour government to intervene and confiscate houses from rich pricks and give them to Labour voters.

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  11. RRM (9,917 comments) says:

    That will effectively halve the amount of high loan-to-value (LVR) lending that the banks are currently doing, making it much harder to get a mortgage with a deposit of less than 20 per cent.

    So all they are talking about is reducing the numbers of such mortgages a bit?
    Hardly the end of the world. Most of the banks are offering sweeteners to get first home buyers to go with them.

    So presumably this move today will just cool the banks’ competitiveness for this business a bit?

    When we bought our house last year, any of the real banks we walked into it was like “we’re thinking about getting a mortgage to buy our first house” was the magic word, and they couldn’t do enough for us. A couple of places the branch manager himself even dropped what he was doing to come see us. It was almost embarrassing, we were after a pretty small mortgage for a pretty cheap house!

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  12. dime (9,972 comments) says:

    20%? that is fucking brutal!

    How is a 25 year old mean to stump up 100k +?

    There has to be better ways to stop house prices going up.

    Foreign buyers – my buddy lives in HK. he wants to buy a rental back here. he said HK banks require 20% deposit … with interest rates of about 2%.

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  13. flipper (4,056 comments) says:

    What a crock…and what a time to announce it.
    The CPI is below the RB target (1 -3%) for the fourth quarter in a row, and at a 13 year low on an annual basis.

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  14. wikiriwhis business (3,996 comments) says:

    Simply put the economy is in free fall and the thought that people should keep their money and stay out of debt is all that can be said fairly about this. also exposes how much the Reserve bank really runs this country. And the western world.

    Only three nations without a Reserve bank. Iraq, Cuba and Nth Korea. Was Libya but we saw what happened there and now they have one

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  15. burt (8,269 comments) says:

    OMG – People won’t be able to be levered into houses they can’t actually afford !!!!!

    The sky is falling !

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  16. smttc (752 comments) says:

    Burt, your assumption is wrong. If the customer cannot afford to borrow the money then the lending does not stack up and is declined by the bank.

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  17. peterwn (3,271 comments) says:

    The market will find a way around it, most probably by second mortgages from finance companies or investors, just like in the ‘old days’ when a first tier lender would lend 66% value only. One feature from the old days is gone, thank goodness. Lenders (banks, State Advances, PSIS etc) made lending decisions on a monthly cycle which meant most buyers had to buy ‘subject to finance’ and wait out up to 6 weeks for lending decisions. So if the house was up for auction – forget it. I saw somewhere (but cannot remember source) that someone was setting up a system to ‘match’ non-institutional lenders and borrowers. In the past law firms did this but then it became discredited when some lawyers started operating Ponzi schemes round it.

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  18. Nigel Kearney (1,012 comments) says:

    The real problem lies in the fact that other forms of investment are unattractive relative to property. Given the level of taxes and regulation we have in NZ, who can blame investors for choosing the option with zero tax on gains, no employees, and no goods changing hands? Drop taxes and cut regulation on productive activity then sit back and watch investment capital flow there instead of into property.

    These blunt instrument approaches to penalize property investors are doomed to fail as there will always be ways around them.

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  19. burt (8,269 comments) says:

    smttc

    Right… and because house prices never go down it makes perfect sense that people borrow as much as possible and lever themselves so tightly – because a few years from now the price would have gone up so much – right !!!!!

    IMHO: If you can’t save 20% equity then you are not in a position to risk entering the market. But I guess I’m not a gen-Y must have everything right now even if I can’t actually afford it type person.

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  20. wreck1080 (3,906 comments) says:

    “Wreck1080, this has nothing to do with the supply issue. ”

    I mean, the reason house prices are rising is due to lack of supply — if there were more houses than needed (in Auckland) then Auckland house prices would be falling.

    Normally, we’d just build more houses. But, due to extremely poor planning in the past we do not have the planning in place to do so (and, council fees are a deterrent to affordable pricing).

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  21. Grendel (1,002 comments) says:

    sorry but this has nothing to do with not being able to afford the payments.

    yes i am one of those with a vested interest as a mortgage adviser, but i have helped hundreds of people buy their first home over the past decade, and within a few years they are paying less on mortgage than they were on rent and not at the whim of a landlord.

    being unable to save a a 20% deposit while renting does not equal not being able to pay a loan back. None of my clients have defaulted or sold due to unaffordability etc.

    Banks are already cherry picking, even when the numbers stack up, in anticipation of the new limits.

    anyway for those who are interested, i wrote a blog entry as well – for how to plan ahead if you are wanting to buy in a year or two and manage your way through the changes.

    http://duxfinancial.co.nz/new-reserve-bank-mortgage-lending-changes/

    apologies for the link spam, but its my first time :)

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  22. Grendel (1,002 comments) says:

    Burt, why 20%, why not 34%, or 19%?

    why is 20% the mark of a good person to lend to, but 15% or 10% is not?

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  23. All_on_Red (1,582 comments) says:

    In Australia, non Citizens/residents can only by new houses. Why not that too?
    Lets face it, the Reserve Bank knows nothing about buyer behaviour.

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  24. Kea (12,812 comments) says:

    Houses prices increased so much and so quickly due largely to the availability of finance. This distorted the market and create a fake boom based entirely on debt. By restricting the availability of finance it should have the reverse effect and lower house prices.

    High house prices are not a healthy sign. It does not benefit the economy to have all that money tied up in non-productive debt. Peoples self interest in the housing market blinds them to common sense.

    The best thing that could happen to house prices is to allow no lending at all on houses. Then you would see what a house is really worth. The current system distorts demand and supply by giving buyers money they do not have. The banks don’t have the money to lend either, hence the bail outs by governments when the housing market falls apart. Take away credit and the only people who will suffer are banks and investors. It would work, but self interest and greed will never see it happen.

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  25. RRM (9,917 comments) says:

    Kea – was it you that set fire to an old car in Cuba Street a couple of years ago in protest against fractional reserve banking? :-)

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  26. Mark (1,488 comments) says:

    The winners: Investors, residential investors Who already have substantial equity in their own home-

    The Losers : First home buyers, recent buyers with substantial mortgages everyone who lives outside of Auckland.

    In isolation this is a crude and very blunt instrument to restrict the demand side pressure on the Auckland housing market. It does nothing to address the supply side problem. Outside of AuckIand where there is substantially less demand the losses in value could be substantial. From the RB perspective that is of no concern as it addresses their inflationary pressure – politically this could be a game changer for National as nothing pisses off voters more than an attack on their major investment

    One expects there ‘ s some tension between wheeler & English at present. Still National sits and fails to address the impediments to better supply of land and increased housing density in Auckland, what a shambles!

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  27. Viking2 (11,467 comments) says:

    Bring it on. Here’s the reason. Us filthy rich rental investors will soon be able to raise the rents. We need another hundy a week and the tenants will just have to pay.
    right now they are buying because they can. That will stop and the won’t be able too without a lot of saving.

    Too bad, how sad.

    Mind you the builders will crash again until the rentals go up.

    fucking with the market never has and never will work.

    Mind you with inflation mow at 0.7% I would have thought that the Gov should be lowering the interest rates some more. We still have the highest rates around.

    That might even drop the dollar some more and make more Kiwi’s richer and allow the Govt. to collect more tax.

    Vicious cycle eh!

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  28. duggledog (1,555 comments) says:

    Dime: 20%? that is fucking brutal!

    How is a 25 year old mean to stump up 100k +?

    This is not the Dime I know and love!!

    In adjusted dollars I could do that and I did do that when I was 21. I did it thus: by not attending university, by leaving school and earning when I was 16. Didn’t bludge off the parents either, went flatting.
    Hence I went home to my own place after my 21st birthday party. I have no special talents or skills. If a 25 year old can’t save up 100k (I’m assuming we’re talking Auckland) then that person has been pissing around.

    That person would have a Nissan Skyline with a $20k DET motor in it, spend all their money on piss, I see it all the time these days.

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  29. georgebolwing (846 comments) says:

    If there is a supply problem in Auckland, it is for a very specific type of property: non-leaky houses in the character suburbs, preferably a pre-1944 bungalow. No amount of new land in greenfields developments on the urban fringes will provide a substitute for what is in demand.

    Most of the demand is coming from natural population growth and internal migration. Blaming ‘the foreigners’ for this is purile.

    Since the Reserve bank can neither magically create more houses built before 1944 nor stop Aucklander breading, it is doing what it can to maintain the stability of the banking system.

    That the loser from this policy intervention are upset is to be expected, but doesn’t reduce the desirability of the policy.

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  30. dime (9,972 comments) says:

    duggledog – adjusted dollars huh? what year? what were you earning? how much was your first deposit?

    Kea – “High house prices are not a healthy sign. It does not benefit the economy to have all that money tied up in non-productive debt.” – Agree

    “Peoples self interest in the housing market blinds them to common sense.” – wellll there is a shit load of money to be made..

    in a perfect world house prices in Auckland would stagnate for 25 years!

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  31. Sean (301 comments) says:

    In Singapore, where million dollar-plus apartments are the norm, we have a 20% deposit requirement. A quarter of this, or 5% of the total purchase, must be in cash. The remaining three-quarters of the deposit may be in cash or more likely taken from your provident fund account (into which you pay 20% of your (untaxed at source) salary and into which your employer also pays an amount equal to 16% of your salary). Young couples will often live at home to save their deposit, probably buying public housing to start with, which comes with some first-time grants from the state. The remaining 80% of the value of the house is borrowed, current interest rate on my apartment is 1.68%. Singapore has one of the higher home-ownership ratios.

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  32. Paulus (2,626 comments) says:

    In fact this may well assist particularly first home buyers in the long run as it will give them equity for the time which will come when interest rates for mortgages increase, and their monthly outgoings increase accordingly.
    In recent years mortgage rates are the lowest in memory, and are fuelled by competition between the Banks.
    The market leader in cheap mortgages is KiwiBank who unlike then others is effectively guaranteed by the Taxpayer.
    They are the leader now in the upward rate trend and others will follow. They have not had the market share they expected, and are financially tight, requiring more capital (taxpayer money via Post Bank) to support their lending.
    Other Banks are not, but have strength by size, and a strong Reserve Bank oversight
    As a reminder 25 years ago mortgages were as high as 21%, with the maximum lender from the banks of $15,000.
    Whilst this was for the times when property values were proportionate for the time and average house prices was about $45,000 in Wellington.
    I know as I had to go to a Solicitor to get another $10,000 at an exorbitant price.
    We had saved the balance over many uncomfortable years, like many others.
    Mortgages like we hear of today would have frightened us being unable to sleep at night.
    But times move on in a prosperous society from 25 years ago. Look at the number of quality European cars on the roads.

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  33. duggledog (1,555 comments) says:

    Dime it was ’88, ’89 when I bought my first house a do up shitter in Hamilton on a double section, had two jobs one full time one part time. I think the house was 65 k and my deposit was 15 k. I had made a bit of extra money doing up cars and selling them as well as my 2 jobs. Interest rates were quite a bit more than they are now as you know. That’s why I tell new home owners to harden up when they whinge about not being able to afford what they want.

    BTW I think 20% is a bit too high

    And don’t worry I went to plenty of parties as well!

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  34. dime (9,972 comments) says:

    duggledog – im not sure 15 grand in 89 is the same as 100k now.

    Sean – how much income tax are you paying up there? isnt it about 7% on the first 80 grand?

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  35. cha (4,010 comments) says:

    RB inflation calculator:

    Housing
    that cost $19,000.00
    in quarter 1 of 1989
    would have cost

    $70,449.93

    in quarter 1 of 2013
    Total percentage change 270.8%
    Number of years difference 24.00
    Compound average annual rate 5.6%
    Decline in purchasing power 73.0%
    Index value for 1989 quarter 1 is 433.4
    Index value for 2013 quarter 1 is 1607.0

    http://www.rbnz.govt.nz/monetary_policy/inflation_calculator/

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  36. Colville (2,268 comments) says:

    hmmm…

    I paid $66,750 for my first shitter in 1990. It was in bottom 10% of this towns price range then. Now it would be around $275K. 20% = $55K deposit. what is the big deal?

    If you live in jaffaland then yeah you have an issue but you DO need to earn at least $10K/yr more to live up there just to break even.

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  37. Kea (12,812 comments) says:

    Kea – was it you that set fire to an old car in Cuba Street a couple of years ago in protest against fractional reserve banking?

    RRM, like all good ideas, you can have too much of it. :)

    If all these people really believed in a market economy then they would love my idea. Debt distorts the market. If houses were purchased for without credit then people would not be slaves to debt for most their lives. People do not want to even think about it, because they know the value of their biggest assett would plummet. The fact is that with no credit for house buying people would be vastly better off and trillions of dollars would be available for productive enterprise. However I know people will hate the idea. Not because it would not work, but because it would.

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  38. Kea (12,812 comments) says:

    dime, I know you have done well out of the housing market and good on you. You earned it. I think you see my point though.

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  39. Fox (206 comments) says:

    So wealthy foreign investors with the ability to borrow large sums of money at extremely low interest rates (eg Japanese) will continue to have unfettered access to the NZ housing market, but first home buyers struggling to save deposits (thanks in part to the exorbitant rents they are forced to currently pay) and desperate to escape the rent-TRAP, will be slammed with restrictions.

    Brilliant.

    Why do Wheeler and Key hate hard working, low income Kiwis so much?

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  40. dime (9,972 comments) says:

    Kea – i do. i held off jumping back into rentals for quite a while. in the end the free money was just too easy to take.

    Dimes protest wasnt going to make a difference :P

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  41. NK (1,243 comments) says:

    This is basically a penalty for first-home buyers in the rest of the country other than Auckland. Housing (un)affordability is mostly a problem in Auckland, and so are high LVRs. So a young couple in Otago looking to buy their first home is now being punished because of stupid land restriction policies in Auckland – urban limits and the like. The young people in Otago should be fuming mad.

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  42. burt (8,269 comments) says:

    NK

    The young people in Otago should be fuming mad.

    Especially so when they move to Auckland for a job and can’t afford a house there !

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  43. BigFish (132 comments) says:

    Colville (985) Says:
    July 16th, 2013 at 1:49 pm

    hmmm…

    I paid $66,750 for my first shitter in 1990. It was in bottom 10% of this towns price range then. Now it would be around $275K. 20% = $55K deposit. what is the big deal?

    When calculating affordability, calculations are relative to wages (the amount you have to spend).
    According to the RB wage inflation calculator, $15k in 1990 dollars is only $29k in today’s dollars, not $55k.

    A $29k deposit on a $275k mortgage is only just over 10%.

    That means you would need to work roughly twice as long to save the minimum deposit required to purchase the same house now.

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  44. Viking2 (11,467 comments) says:

    In any group of people how many couples have incomes of 100K or more?
    How many live on 50K and save the other 25K
    4 years at 25K = 100k. damm good deposit.

    So it takes time but hardly hardship living.

    Its not what you earn but how much you keep that matters.
    Spend like a drunken sailor and the money soon goes.
    Just started one of my staff recording every cent she spends. (she is always out of money. Never been educated about money) Oh is she learning quick.
    If you don’t know how much you spend and where and when then odds are you will never save.
    Coffee/cakes for morning tea lunch and other sat the cafe soon puts a hole in $100.00

    So rreally people should learn about money and stop whinging.

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  45. Bob R (1,371 comments) says:

    *** So a young couple in Otago looking to buy their first home is now being punished because of stupid land restriction policies in Auckland – urban limits and the like. ***

    Demand from foreign investors & immigration too. Although those apparently can’t be reduced, EVER.

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  46. Sean (301 comments) says:

    @ dime – yes, around that – SGD7950 on the first 120K, so around 6.6% but there are concessions available to reduce your taxable income.

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