It is a widely-acknowledged issue that the demand for housing in New Zealand greatly outweighs supply. Such is the imbalance that even with investment in new builds, the situation will continue for many years to come. So, as house prices continue to soar to greater and greater heights, the Reserve Bank has implemented Loan to Value Ratio (LVR) restrictions in an attempt to apply the brakes and is considering limits on Debt to Income Ratios (DIR). To clarify what this means for the property market, and how it may affect landlords and investors, we've spoken with Greg Scott, founder of the Home Loan Shop.
The LVR is the amount of your loan compared to the value of the property and it is calculated by dividing the amount of the loan by the value of the property. The LVR restrictions are designed to reduce the demand for housing, and simultaneously encourage new builds on a larger scale to address the discrepancy between supply and demand. It is hoped that this will eventually succeed in making the market more accessible to first time and lower income buyers in notoriously unaffordable areas such as Auckland.
The restrictions limit the number of high LVR mortgages. Under the restrictions, Banks are permitted to make no more than 10% of their residential mortgage lending to high LVR (less than 20% deposit) borrowers who are owner occupiers, and no more than 5% of residential mortgage lending to high LVR (less than 40% deposit) borrowers who are investors. Given the low threshold for lending for residential property investment, in most cases investors will now need to have a 40% deposit. Importantly, neither of these rules have been applied to new builds.
The DIR is a measure of debt compared to household income and it is calculated by taking the amount of debt and dividing it by household income. Introducing a DIR limit will constrain the amount of money that can be borrowed to a designated multiple of household income. For example, if a DIR limit of 4.0 is imposed, a household with a combined income of $80,000/year may only be able to borrow a maximum of $320,000 for the purchase of a house. The Reserve Bank is yet to implement any of these DIR limitations, and it is not known what rates would be set if it were to. Greg says “Personally, I believe that they will bring in the limitations, but they will certainly wait to see how the LVR restrictions pan out in early 2017”.
The reasoning behind the introduction of DIR limits would again be to reduce demand for housing. They would also hopefully work to limit the risk for banks and the public alike in the unlikely case that prices fall in future.
Current LVR restrictions have already begun to have an effect. A number of residential buyers (particularly first time) and investment property investors are unable or unwilling to purchase property without extra assistance (e.g. from family).
It is still unclear how house prices will be effected in the medium term but according to Greg, “One positive side effect is that we are certainly seeing a reasonable increase in the number of our customers considering building their own home or rental property, as the deposit rules won't apply”.
There is uncertainty over the impact that a DIR regime may have on the property market. A lot will depend on the limit imposed, however, some market commentators are suggesting that it could curtail the number of new investors entering the market , which could dampen supply or push up rents.
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Quinovic, the experts in property care and return
