There are at least four good reasons for introducing LVRs.
The first is that they protect first-home buyers from being trapped into high levels of debt that they might not be able to service if interest rates rise dramatically in the next few years – which they are expected to do.
Given the projected interest rate rises of two full percentage points over the next two years, we are likely to see bank rates rise above 8 per cent and it seems entirely reasonable to imagine retail mortgage rates going above 10 per cent within the next five years. That’s where they were in 2007 and in the 1980s they went much further.
Interest rates are currently at historically unprecedented lows and that is a dangerous place to be taking on a low equity mortgage.
Worse still, if were to see the kind of house price crash that happened in the US five years ago, then it is these people with the highest debt levels who will be most likely to hit negative equity.
In other words, they could be left owing more to the bank than the house is worth. In these conditions those with high debt levels lost their homes along with their deposits and all the rest of the money they had put into their homes.
So yes, it is a bummer if you’ve missed the chance to buy a house this year because of the LVRs.
But, if you can’t afford a 20 per cent deposit on a house, then perhaps you can’t really afford the house. And if that’s not fair then it is not fair because of the fact that house prices are too high.
Which is a second good reason for LVRs. If they dampen demand they could potentially lower house prices. In Auckland and Christchurch they almost certainly won’t, but they could help slow growth and that could buy some time for house hunters to keep saving for a deposit.
A third upside to LVRs is that if they work they will reduce the need for the Reserve Bank to raise interest rates as fast as it might have. That’s good for all mortgage holders, especially new home owners with high debt levels.
Finally there is the official reason the Reserve Bank is introducing these restrictions. The bank has a statutory duty to ensure the stability of the New Zealand financial system for the good of the country. That means it has some control over how banks are allowed to behave.
The Reserve Bank is simply not comfortable with the banks holding a high level of low equity loans in the wake of the worst financial crisis the world has seen since the Great Depression. Debt was to blame for the crisis in 2008.
So to those who say the bank is being overly cautious, one can only ask: “Dude, what planet have you been on for the past five years?”
A good summary of the case for the LVRs. However they are no silver bullet he reminds us:
If the gap between supply and demand is wide enough, no amount of regulatory policy can hold back the market – just look at China where far heavier bank lending restrictions are doing little to cool the urban housing boom.
One has to increase the supply, and that will not work unless you increase the land supply.