Loosened LVR settings long overdue - adviser

Banks will be able to write up to 25% of new lending for owner-occupiers with a deposit of less than 20% and up to 10% for investors with a deposit of less than 30% from December 1.

Advice HQ founder and adviser David Green, who has a banking background, says the loosening of LVR ratios is long overdue as low deposit bank lending has been restricted for new to bank clients and pre-approvals even for existing customers on and off over the past year.

“Some banks are being quite brutal, and available lending is changing week-to-week, depending on what the funding profile looks like.”

Green had an existing bank client this week apply for pre-approval and after their application had been in the queue for a few days the bank’s credit policy changed and they were chucked out. “There is no client care if they can just change their credit policies within days,” he says. 

Banks are saying there is funding for low deposit buyers, but Green doesn’t agree with that assertion.

“Another low deposit client recently had an application in at a bank for lending but was declined because the new build they wanted to buy was beyond the six-month Code Compliance Certificate (CCC).”

If a CCC is beyond six months banks won’t classify the properties and lend on them as new builds because they are no longer RBNZ exempt. “Funding and the rules for obtaining that type of lending are more difficult,” he says.

It is a massive problem across Auckland. Thousands of new build townhouses have been sitting unsold for more than six months.

“The RBNZ should have been jumping on this and seen the mismatch between 20% and 25% of banks’ new lending to low deposit lenders a long time ago, particularly with the amount of unsold new stock on the market, Green says. 

“If RBNZ staff has been out talking to people on the street they would have known about this six months ago and fixed the issue.”

Unfortunately, says Green the RBNZ is slow moving and reactive as demonstrated after the pandemic.

“It’s frustrating the bank can’t see these problems before they arise. The LVR ratios could have been loosened much earlier as the housing environment has been low risk for some time. 

“House prices and interest rates have flattened out to pre-Covid levels.”

Fewer tightenings expected

The introduction of debt-to-income (DTI) restrictions last year means LVR settings can be less restrictive on average, the RBNZ says.

The new settings are expected to be the long-run average that will apply under the DTI regime.

Westpac senior economist Darren Gibbs says the RBNZ’s view has migrated a little on this score as previous adjustments have been sometimes described as moving LVR settings towards long run neutral levels.

“The RBNZ’s latest estimate of the sustainable range for house prices now shows house prices lying within that range.”

Gibbs says the RBNZ isn’t relating the changes to its estimates of sustainable house prices, but neutral LVR restrictions seem appropriate given these estimates.

Existing exemptions from the LVR restrictions – such as for construction loans and Kainga Ora First Home Loans – are unchanged.

For owner occupiers, the share of lending exempt from the LVR restrictions is about 6%, whereas for investors – who often buy newly constructed homes – the share exempt is about 27%.

The RBNZ intends to review DTI and LVR settings annually and it expects to tighten LVR settings from their long-run level less often than in the past, with DTI restrictions automatically becoming binding in housing upswings and periods of low interest rates.

The central bank expects to keep DTI settings stable over the cycle. For both the LVR and DTI policies, the RBNZ intends to review the assumption for long-run settings every three to five years. The RBNZ also notes that its preferred response to severe economic downturns will be to reduce the counter-cyclical capital buffer – a new tool that will be introduced over the next few years – instead of easing LVR or DTI restrictions.

Housing demand should lift

In terms of the expected impact on the housing market, Gibbs says the easing in LVR restrictions should eventually help lift housing demand, particularly for first homeowners who tend to be most challenged in raising a 20% deposit.

“In general, though, LVR restrictions have not been binding, hence we shouldn’t expect any significant near-term impact from the change.

“However, as the housing cycle turns and values rise these restrictions will become more binding. Hence the changes today will help the housing cycle run further that otherwise,” he says.

The RBNZ estimates the combined investor and owner occupier share of new lending with an LVR of more than 80% will increase to about 16% from 13% at present (about half of the peak seen prior to the introduction of LVR restrictions in 2013).

Gibbs says the dominant impact on housing demand will be the path taken by mortgage interest rates, population growth and the general performance of the economy – especially  the labour market.