Reserve Bank to introduce beefed-up loan-to-value ratio restrictions amid fears of 'sharp correction' to house prices

Loan-to-value ratio (LVR) restrictions will be tightened even further amid concerns over the potential for a "sharp correction in the housing market", the Reserve Bank has announced.

Restrictions will be reintroduced on March 1, requiring property investors to stump up a 30 percent deposit for a house, with first-home buyers needing 20 percent.

From May 1, this will be increased to 40 percent deposit for investors.

LVR restrictions were dropped last April amid fears the COVID-19 pandemic would wreak economic carnage and cause house prices to plummet. However house prices have gone in the opposite direction since then, climbing to record highs as interest rates fell.

This has prompted the Reserve Bank to introduce further restrictions, with Deputy Governor and General Manager of Financial Stability Geoff Bascand saying they're needed to reduce the risks of high-risk mortgage lending.

"We have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace," he said.

"We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.

"A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid 'fire sales' that potentially amplify any downturn.

"These financial stability risks exceed the situation at the time of the Bank's December LVR consultation, resulting in more restrictive policy settings being decided on."

From March 1, the Reserve Bank will reinstate LVR restrictions at the same level they were set at prior to the onset of COVID-19. A further tightening of investors' restrictions will take effect two months later, on May 1.

"The two-step process is necessitated by mortgage lenders' operational capabilities," Bascand said.

It's widely believed that the reintroduction of LVRs - the size of a loan in comparison to the value of a property - will start to cool the property market

Quotable Value (QV) said skyrocketing house prices could be mitigated by reintroducing LVR limits. The Reserve Bank confirmed in November 2020 that it would reintroduce them from March this year

"When the LVRs do eventually kick back in just as the weather begins to cool in March, I expect the property market will start to cool as well," QV general manager David Nagel said in December.

However not everyone believes tighter LVR restrictions will have the intended effect. Property expert Ashley Church says they'll "make absolutely no difference to house price inflation, and will dash the dreams of a section of first-home buyers again".

The changes to LVR restrictions:

From March 1, 2021

  • LVR restrictions for owner-occupiers will be reinstated to a maximum of 20 percent of new lending at LVRs above 80 percent.
  • LVR restrictions for investors will be reinstated to a maximum of 5 percent of new lending at LVRs above 70 percent.

From May 1, 2021

  • LVR restrictions for owner-occupiers will remain at a maximum of 20 percent of new lending at LVRs above 80 percent.
  • LVR restrictions for investors will be further raised to a maximum of 5 percent of new lending at LVRs above 60 percent.