The Reserve Banks’ plan to cut down on the number of mortgages with high loan-to-value-ratio’s (LVR’s) is attracting criticisms from all sides- including the banks who will be forced to implement these measures in the near future.
But why are these measures needed?
Bluntly- to prevent and minimise the large scale purchase of risky debt.
Unfortunately, those who tend to undertake high LVR loans, are seen as riskier clients- more likely to default on their mortgage, as they likely are on lower incomes (and therefore had smaller savings), or are poor savers themselves. The amount of loans offered with high LVR’s has increased exponentially over the last few years.
However, this has been compounded by the fact that the NZ housing market has been red-hot, with both prices and demand skyrocketing. The result? Larger LVR’s becoming more frequent, and the Reserve Bank worried about NZ’s financial stability.
So what could this mean for me?
While the exact terms of the policy are still uncertain, Westpac’s staff believe that only 12% of new mortgages will be allowed to have a deposit of less than 20%- a steep reduction from the 30% of market share dominated by high LVR mortgages in the last year.
This in turn likely result in banks lifting their interest rates for the limited few low-equity loans available. With such a limited supply demand is sure to be high, and consumers will certainly pay more as a result, Westpac has indicated.
Inversely, those who purchase loans with high equity just may be better off, Westpac has implied. This is because banks will be competing against each other for high equity clientele, as they will be much easier to lend to under this new scheme.
According to Westpac’s economists, this is set to cripple the ability of potential first home buyers to enter the market, with one of their economist saying “Some first home buyers will be excluded from the market by the higher mortgage rates they face. These people will rent instead”.
At the same time, the market will be left wide open for investors, as “investors normally have higher equity stakes in their portfolios, so they will be among the people enjoying discounted mortgage rates”. Furthermore, “Investors will also experience greater demand for rental accommodation and less competition from first home buyers at auction. The LVR restrictions could create great conditions for property investment”.
The Bottom Line:
Westpac’s economists believe that these measures may have no effect on the burgeoning property market they were enacted to limit- “Although LVR restrictions will severely dent first home buyer demand, we suspect that ongoing investor demand will ensure house prices continue their upward march.”
Furthermore, they have estimated that these policies will affect house prices “only a little” and have already started new mortgage structures designed to circumvent these rules.
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