property investingIt could have been worse for property investing. The RBNZ could have dropped a debt to income test on you. Be thankful that they didn’t.

Having a higher LVR requirement for property investors is actually the right move in my view because it should give first home buyers (FHB) a chance to catch up and a chance to compete, while avoiding a broad collapse in property prices.

The reasons for rising property prices are well documented but here’s a recap to give you a bit of context as to the new 40% rule from the RBNZ. Why property prices have risen so…

  • Immigration – Lots of Kiwis coming back to NZ, fewer leaving for places like Australia plus the usual flow of foreigners – they all need a roof over their heads.
  • Housing supply – We haven’t been building enough houses for like, years now so there’s a shortage of property. Councils have been partly blamed for not being developer friendly, and whether or not you agree with that, certainly more land supply and punching out building consents faster would be great. There’s also only so many builders and only so much building materials that can be deployed at any given time too. Land and housing supply is limited, constrained.
  • Bank behaviour – I’ll explain this more in a second, but investors have had a much easier path when borrowing money compared to FHB. Macro-prudential tools the banks use always have side effects and the inclination towards investment financing over first home financing is a clear example of that.
  • Falling interest rates – These have thrown fuel on the fire and made borrowing even more  attractive.

You don’t need a degree in economics to understand the demand supply imbalance that’s going on when you can literally see the effect it’s had on prices. And since there are many parts to the puzzle, a silver bullet solution probably doesn’t exist either.

So what choices are there? Can you genuinely dampen the demand for houses and ramp up supply easily, quickly or at all??

Well, you can’t exactly stop expat Kiwis coming home and you can’t tell people to bugger off to the Aussie mines anymore either. Stopping the flow of foreigners would have some impact but that piece of the immigration pie isn’t as big as many think.

I think moves are afoot on the land/housing supply side, but that response is naturally slow because there are physical limits on labour, land and materials, and bringing them together doesn’t just happen overnight. Even under good conditions it takes 6 months to build a house. Multiply that by 100,000 houses needed and it’s gonna be a slow moving beast.

Falling interest rates, well they’re almost beyond our control and frankly, most people see cheap and/or falling rates as a good thing so why stop it?

In terms of getting an easy and effective win, the choice therefore is to manipulate bank behaviour because that’ll change what the man on the street is capable of doing. Make it harder to borrow and you make it hard to buy. And that right there will knock back property investing demand and in turn put a lid on price increases.

It won’t stop things in their tracks thanks to the other factors. But it’ll put some brakes on.

Adjusting the lending rules is an expedient option but when you look back at the context of the initial LVR restrictions, bigger deposits from investors now will do a pretty good job of slowing things down.

The initial deployment of LVRs in 2013 didn’t do away with low deposit lending (as some people, incorrectly, still think), but it did mean there was less of that kind of lending available. Much less. It also meant that the banks had to apply a test as to who might get that now-limited pool of loan money. They had to ration it.

So a harder affordability test was put on people with small deposits. FHB typically have small deposits so it meant that buying a first home got harder because borrowing was harder to do.

At the same time the costs associated with lending to people with big deposits and/or lots of equity actually fell. This group of people found borrowing quite easy.

Against that you’ve had falling interest rates and a group of people (my parents and yours) who are looking at their retirement and wondering where their income is going to come from when they stop working. Answer: Rent from rental property.

Add the other demand and supply factors which are driving property price rises and you can see why FHB are starting to squeal their way into becoming a political problem. Buying has become harder for them and way easier for others.

Hence my view that hitting property investors harder on the LVR front is the right move. Bear in mind that you don’t want to kill off investors completely, after all the supply of rental property is a good thing. But a wee measure to put the brakes on was overdue.

Next step would be for the RBNZ to open the valve on low deposit lending for owner-occupiers. To let the banks let a bit more of that money through the gate and help a few more FHB into property. It’d mean the banks don’t have to ration this pool of money quite so hard and the affordability test applied by the bank would be easier to cross and in turn more FHB would actually realise the dream.

Want to see what the changes mean for you and home ownership? Give me a call.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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