What looser LVRs mean for the housing market

These amended limits aren’t huge but they shouldn’t be underestimated. Sharon does the maths for us: “A 5% increase may not sound like much, but it’s a 50% increase in the proportion of lending that can be done at over 80% LVR, she says. And it’s not a fixed amount of lending, it’s a proportion of a total that can go up and down, she adds.

The economist has heard anecdotally from mortgage brokers that there’s unmet demand for high-LVR lending, so she expects buyers to respond to the loosened LVRs.

Banks are pretty much filling their high-LVR allotments (of 10%) at the moment, says the ANZ Property Focus report. So the change in June to 15% for owner occupiers will likely result in more mortgage lending than otherwise, more house sales and a slightly higher floor in house prices, it says.

The real estate industry has welcomed the move with open arms.

“The LVR easing and the recent lower than expected inflation figures are the first green shoots we’ve had in about 18 months,” says Craig Lowe, Managing Director of Lowe & Co in Wellington. The LVR change will increase the buyer pool and favour first home buyers, the agency head says.

The Reserve Bank’s amendment of LVR limits shouldn’t be knocked, agrees James Wilson, Quotable Value (QV) Operations Manager.

“Changes like these which promote additional access to borrowing for certain buyer types, all add to turning around market sentiment which has remained extremely cautious and pessimistic since the OCR and interest rates began to increase,” he says.

It’ll make saving up for a deposit a little easier for first home buyers which is no mean feat amidst the current cost of living crisis, says James.

CoreLogic head of research, Nick Goodall adds: “It’s not just the changes themselves but it’s the idea of the LVRs being loosened, it just opens the doors to more people.”.

For real estate agents, it’s a good discussion point to have with buyers in the coming weeks, Nick suggests. First home buyers are less knowledgeable about LVRs. He suggests saying to clients, ‘Are you aware that you can get a mortgage with a lower deposit now?’ It’s about using it as a conversation starter then they can flesh out the details with their mortgage broker,” he suggests.

As well as providing a boost for first home buyers, there will be a flow on effect, creating a whole pool of second home buyers, as they move on from their first homes, says Loan Market mortgage adviser, Bruce Patten.

Another consequence of the LVR limits easing is it opens the banks up, not just to existing customers but to new customers, he says. Since the restrictions came on in 2021, some banks have only done their high-LVR lending with existing customers, says Bruce. Now they’ll be able to have conversations with new customers too, he says. BNZ, for instance, has opened up its high-LVR lending to both new and existing customers now, he says.

All agree, first home buyers are the ones who will benefit most from the more relaxed owner occupier high-LVR lending conditions because they tend to be the ones with the lowest house deposits compared with those who already have equity built up in their homes.

They do, however, have to be aware that if they only put down a 15% deposit, it means they have a higher debt-to-income ratio, with higher interest rates, stresses Nick. So a 20% deposit is still preferable, but it’s good news for high income earners who are struggling to get to a 20% deposit but are easily able to service mortgage payments.

CoreLogic has just reported in its Q1, 2023 First Home Buyers report that these buyers are maintaining a market share of around 25%, despite the challenges of affordability pressures, tight lending rules and higher mortgage rates. The long term average for first home buyers is more like 21–22%.

First home buyers are making the most of weaker conditions but they will be affected by debt-to-income ratios coming in, in March or April next year, CoreLogic warns.

First home buyers are key, says Craig Lowe. “It impacts the whole market when they come back in, it changes things for everyone. The availability of credit tends to be the spark that lights the fires of change,” he says.

And with current interest rates probably nearing the end of the upward cycle, that's when people want to buy, he adds. Their total interest costs will be lower over the next 10 years, he adds.

New Zealand Institute of Economic Research (NZIER) Principal Economist Christina Leung thinks the measures should increase housing demand and may have the potential to crowd out first home buyers.

She cautions, while looser LVRs should support some recovery in house market activity, higher interest rates should still be the dominant factor in dampening housing demand.

And while the unemployment rate remains historically low, the slowing in economic activity should flow through to a slowing in hiring demand, which should make households more cautious about taking on new debt and hence will weigh on housing market activity.

If owner-occupiers are expected to take advantage of the new lending conditions in June, don’t expect investors to be lining up with the eased lending constraints, say real estate experts.

Craig says he’s never seen a time when there have been so few investors in his Wellington market in 23 years. “It’s out the window,” he says.

For investors, this isn’t such great news, says Bruce. It doesn’t go a long way to help their next investment. If the property market has dropped 15% and they’ve managed to get another 5% of value, they’re still 10% short, he says.

QV Operations Manager James Wilson says investors remain cautious, opting to sit on the sidelines as they wait to see whether value levels will plateau.

Investors may well continue to sit on their hands and wait to see if there’s a change of Government in October, say commentators.

ANZ’s Sharon Zollner says investors are hanging on until the election, but if it doesn’t go their way and tax deductibility rules continue, a number will throw the towel in, she believes.

As with all investments, says Christina, investors will be weighing up the cost of borrowing, versus the rate of return. In the current environment of rising interest rates (economists are forecasting a 25 basis point or 50 basis point rise on May 24) and with the ability to deduct interest for investment properties being phased out over the coming years, this higher cost of borrowing should keep investors cautious about investing in housing, says the NZIER economist