Today’s property market is a lot different from what we experienced only a couple of years ago. Rental properties are more sought after than ever. Just turn on the 6.00 pm news and you’re bound to hear an update on the current housing crisis and as the number of properties available for sale in New Zealand falls to a record low, there’s continuing pressure on house prices as demand outranks supply.
When we look at Taranaki’s regional breakdown, the latest figures from REINZ’s year on year report show that the median house price for 2020 sat at $500,000 an increase of 19.6% in comparison to 2019. Despite lenders offering historically low-interest rates, many first home buyers are still struggling to get onto the property ladder as the unrealistic amount needed for a deposit is growing at an alarming rate.
This is creating a social and political powder-keg. As first home buyers, and even up-sizers, are pushed out of the market, the focus is turning on property investors and methods for curbing their ability to acquire more of the housing stock. While owners of multiple homes benefit from the equity to meet growing prices many others are unable to do so and feel short-changed.
The Reserve Bank of New Zealand introduced Loan to Value Ratios (LVR) back in 2013. The LVR is the amount of money a person needs to borrow as a percentage of the total value of a property. They were introduced as a way of protecting mortgagees from over-leveraging themselves and protecting them from financial shocks, like the 2008 Global Financial Crisis. Since then it’s been used as a useful lever for making homes more, or less affordable, based on the country’s financial situation and risk. Lower LVRs for first home buyers have helped them get on the property ladder and adjusting the percentage of mortgages they can offer outside of the LVR restrictions has helped people get into homes even if they don’t have a 20% deposit.
In order to help combat the housing crisis, in 2020, the reserve bank introduced a new LVR (Loan to Value Ratio) restriction of 30%, which meant home buyers needed a larger deposit to purchase a property. This was in an attempt to curb the rising cost of housing in New Zealand. This was then quickly suspended altogether for a 12 month period due to the COVID-19 pandemic. This move was set to help allow banks to support customers through the impact of the pandemic. Alongside this, the Reserve Bank has been lowering its Official Cash Rate (OCR), which is the baseline interest rate it offers money to the banks. This was reduced from a low 1% to a record-setting 0.25%, with rumours whirling that it may even go as low as 0% or negative values.
Fast forward to 2021 and the Reserve Bank has made a further change to the LVR lever by announcing that the LVR restrictions will be reinstated from the 1st of March 2021 in an effort to help cool the housing market. However, rather than reintroduce them at the more aggressive 30% deposit requirements seen before the pandemic the Reserve Bank is looking at a 20% deposit requirement for owner-occupiers.
It’s a different story for investors. From May 1st at least 95% of new bank lending to residential property investors will be set to 40%, the highest it's ever been for residential investors. As an interim measure, from the 1st of March to April 30th the deposit requirement for residential property investors will be 30% for existing loan applications, but for banks to respect the new 40% LVR for all new approvals.
So what do the LVR restrictions mean for investors?
The reserve bank’s latest announcement means that as of the 1st of March a 30% deposit will be needed from investors looking to purchase a property. Most major banks have already adopted these rules ahead of the planned March reintroduction. From the 1st of May, property investors will have to go to borrowers with deposits of at least 40%.
In fact, New Zealand’s largest home lender had already begun implementing stricter lending requirements for residential property investors. In a self-imposed restriction, ANZ had already introduced a 40% deposit for investors back in December 2020. According to interest.co.nz, ANZ's managing director of personal banking Ben Kelleher said that “escalating property prices are putting homeownership out of reach for many Kiwis. The current settings favour property investors particularly over first home buyers, potentially locking a generation of New Zealanders out of homeownership. It’s in everyone’s interests for residential property prices to be sustainable long term, and for homeownership to be accessible to as many people as possible. As New Zealand’s largest home lender, decreasing the LVR on residential investor lending is one thing we can do to help bring balance to the residential property market.”
In a speech made in February 2021, Finance Minister Grant Robertson warned that further government action was coming to cool the housing market. "There is a crisis when it comes to the housing situation right now in New Zealand," he said.
The Reserve Banks New Rules Include:
From 1 March 2021:
- LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be reinstated to 95% of new lending at LVRs of 70%.
- New residential property investor applications must respect the new 60% LVR.
From 1 May 2021:
- LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be further raised to 95% of new lending at LVRs at 60%.
Reinstating the LVR policy will also reinstate the existing exemptions applying to the LVR restrictions for both owner-occupier and investor mortgages, including:
- A new build exemption where the borrower commits to the purchase at an early stage of construction or buys the residence (within six months of completion) from the developer;
- Kāinga Ora’s First Home Loans scheme (formerly Welcome Home Loans), for low deposit borrowers, to buy their first home; and,
- Loans for remediation required to bring a residence up to new building codes, or to comply with new rental property standards (for example, installing insulation).
For first-time property investors looking to purchase a rental investment property, saving a 40% deposit may feel unrealistic. Add to these new requirements and restrictions on landlords and property may become a less appealing option for those looking to build a retirement plan or passive income. But it’s not an impossibility.
The good news is, if you already own your own home, chances are you have accumulated equity over the years. This equity to a lender is the same as cash and some, or all can be included in your deposit calculations. If you would like to learn more about how to use your home’s equity, check out our previous blog here.
If you’re thinking about getting into property investment, then you’re in the right place. Investing in property isn’t something that can happen overnight. It takes years of creating a financial plan, planning your investments wisely as well as doing your research. For many seasoned investors, the new LVR restrictions will have little impact on their long term plans. And for seasoned investors looking for peace of mind that their portfolio is compliant with new laws and managed effectively, the hands of a property investor are a great place to put your rental properties.
It’s not too late to start looking at investing, or to hand off your investments to a property manager. If you’re unable to secure a 40% deposit right away that doesn’t mean you’re out of the game. To help get you started and planning for your investment future we highly recommend downloading our “Ultimate Guide to Property Investing”.
There is no better time to start working towards your dreams than now.
