The New Zealand Housing Market Gets Some Good News as the RBNZ Lowers Loan-to-Value Ratio Limits
The recent relaxation of loan-to-value ratio (LVR) regulations by the Reserve Bank of New Zealand (RBNZ) has prompted cautious optimism about the future of the New Zealand real estate market. The RBNZ’s move comes amid talk that interest rates may have reached their top and may indicate the bank thinks the worst of the real estate market downturn is over.
Buyers, especially those thinking about a long-term investment in a home, will welcome this news with open arms. The new laws, which take effect on June 1, 2023, raises the amount of new lending that can occur over 80%, and for property investors, you’ll now be able to borrow up to 65% of what the property is worth (up from 60%).
So to purchase a $1m investment property, you now only need a deposit of $350k (or available equity of the same amount in another property).
These LVR caps were initially implemented in November 2021 with the goal of fostering financial security by reducing the availability of high-risk mortgage financing. The strategy appears to have paid well, since New Zealand’s banking sector weathered the ensuing correction in the property market with very little ripple effects.
Deputy Governor Christian Hawkesby noted in a recent RBNZ media release, “Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency. In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see,”
Hawkesby continues by saying that the earlier limits may no longer be necessary because the dangers to financial stability presented by high-LVR lending have decreased to an acceptable level. This change has the potential to increase efficiency and expand access to loans for borrowers who might otherwise be turned away due to prohibitive deposit requirements.
In line with their medium-term fundamentals, national home prices have been on a declining trajectory. Prices could fall more, although a major reversal is less likely at this point. As a result of this shift, lending standards have tightened considerably, with higher interest rates being taken into consideration by banks’ debt servicing assessments.
To declare an imminent real estate boom would be premature, but there is cause for cautious optimism at the moment.
Easing LVR limits could be the catalyst the market needs to stimulate growth and make real estate more affordable to the general public. It’s good news for anyone who wants to put money into real estate, but it’s also a good time to plan ahead rather than act hastily.
The RBNZ’s decision to modify LVR standards appears to be a well-calculated step towards the objective of a resilient and sustainable recovery in the New Zealand property market.