Apartment size key to future lending

Auckland is set to grow upwards and outwards – if the Independent Hearing Panel’s recommendations on the Unitary Plan are adopted by the Auckland Council.

That means there will be a significant increase in apartments in and around the CBD, as well as around urban centres and the city’s transport nodes and corridors.

But the Panel also recommended that existing restrictions on apartment sizes, which were introduced back in 2007, be removed.

This would allow for the development of more smaller apartments – which are cheaper to build and, in turn, cheaper to purchase.

Veteran apartment agent City Sales’ Martin Dunn is relieved the apartment size restriction is set to be dropped.

He said many people are opposed to so-called “shoebox apartments” but, in reality, it is not the size of the apartment which is the issue.

“Rather it is the construction and design quality of the apartment and the mix of occupants in an apartment block which count. Smaller apartments don’t need to be poor quality.

“But they are still cheaper for developers to build and that means they can be more affordable to people wanting to buy – especially young people who don’t have much of a deposit or equity.”

There is growing market demand for good quality, small apartments but the problem is that banks are weirdly opposed to lending on them, Dunn said.

“They will lend up to 90% on some rundown old bungalow in Takanini, but only 50% on a brand new, good quality, secure but small apartment in the CBD. I just don’t understand the attitude.”

In his view, if the banks’ would allow 80% lending on small studio apartments, young people could afford to buy property in Auckland and, longer term, it would help to alleviate some of the city’s supply shortage.

The Mortgage Supply Company’s David Windler agreed that banks have different and quite restrictive lending criteria for apartments.

He said each bank has its own rules and criteria when it comes to apartment lending, particularly when it came to smaller apartments of under 50 square metres.

“Size is very important and all the banks have different square metre requirements. If the bank is not going to lend the maximum LVR, with apartments they tend to default to 50%, but it depends on whether an apartment is considered standard or non-standard (which is based on size).”

There is also a difference in what is available to investors and what is available to investors and what is available to owner-occupiers.

For owner-occupiers there is the potential to get higher LVRs on smaller apartments, but Windler said that would not be the case for investors.

However, the Unitary Plan is a challenge to the view that banks take in a lot of their current credit policies, including small apartments, he said.

“If the Unitary Plan is adopted by Council, banks will have to start reviewing their apartment lending criteria and they will have to adapt.

“I think there will be a willingness to adapt and be flexible where there is an owner-occupier, but probably not so much for investors.”

Go2Guys mortgage brokers Campbell Hastie also thinks there will be a big impact if the Unitary Plan encourages developers to build lots of little apartments.

Traditionally, small apartments are cheaper, but it’s been harder to buy them because it’s harder to get finance for them due to bank wariness, he said.

“But we have seen some movement from the banks on this in recent times. They seem to have become a bit more comfortable with their requirements on apartments.

“And there is much better quality stock out there now which probably helps their concerns.”

Hastie said banks should continue to get more comfortable about them – because they will have to.

“It used to be that apartments were weird and Kiwis just wanted the quarter acre dream. That has changed and now they are a genuine option for many people.

“The apartment market is maturing and stabilising and that means that banks should be more flexible with their criteria when it comes to apartment lending.”

All four of the big banks – ANZ, BNZ, Westpac and ASB – told mortgagerates.co.nz that size was a crucial consideration when lending for apartments.

ANZ has two LVR rules for apartments: 80% for standard apartment and 50% for non-standard and leasehold. But the Reserve Bank’s new LVRs for investors also apply.

Likewise, Westpac has two rules: For apartments of 50 square metres or more, their required LVR’s range from 60% to 85% depending on occupancy type. For apartments of less than 50 square metres, LVRs range from 50% to 65%.

ASB said apartment size is a key consideration in their assessment of apartment loan applications.

This is because the value of smaller-sized apartments can sometimes be more volatile relative to larger apartments or other property types. But the policy remains under constant review.

BNZ said they are committed to growing their share in apartment lending in recognition of the role apartments will play in housing intensification under the Unitary Plan.

“In the case of smaller apartments (typically less than 50 square metres), it’s about ensuring customers are aware of the increased risk if the market changes, for these apartment types.

“For this reason we typically require a higher deposit than larger apartments - and ensure a realistic valuation is in place to reflect current conditions.”

Kiwibank will lend to a minimum apartment size of 40 square metres. But it sticks to LVRs aligned with regional boundaries, type of ownership (ie: owner occupied or investment), and the Reserve Bank’s speed-limits on lending.