Property economist doubts loan-to-value ratios to be loosened in 2023

  • 16/01/2023
It could be "counter-productive" to what the RBNZ is doing with the OCR.
It could be "counter-productive" to what the RBNZ is doing with the OCR. Photo credit: Getty Images.

A property economist doesn't expect loan-to-value ratio (LVRs) restrictions to be loosened anytime soon as such a shift could be "counter-productive" at a time the Reserve Bank is trying to cool the economy.

LVR restrictions place a cap on how much a bank can lend relative to a purchase point. 

Currently, most people seeking a loan from a bank to buy a property they will occupy will need a 20 percent deposit. Just 10 percent of a bank's total lending is allowed to go towards what's called "high-LVRs", meaning the loan is more than 80 percent of the property's price.

For investors, most have to stump up a 40 percent deposit and just 5 percent of banks' lending can go to high LVRs (meaning a loan of more than 60 percent of the property value).

LVRs were removed in 2020 at the start of the COVID-19 pandemic when forecasts for the housing market were weak and the RBNZ wanted to ensure a steady flow of cash. However, after prices instead rose rapidly, LVRs were reinstated - and then tightened - to limit the amount of mortgage borrowing.

Kelvin Davidson, CoreLogic NZ's chief property economist, on Monday said he doesn't expect the LVRs to be loosened this year.

"The current housing downturn isn't triggering major financial stability risks (such as widespread mortgagee sales) – and technically those would have to be apparent before looser lending rules would start to be pondered by the RBNZ," he said.

"Indeed, in a falling housing market, looser LVRs might actually create their own risks, e.g. greater chance of negative equity if people only require small deposits."

It may also be "counter-productive" to loosen LVRs when the RBNZ is attempting to combat inflation with a higher official cash rate (OCR), Davidson said.

By cranking up the OCR - it went up a record 75 basis points in November - the RBNZ is attempting to dampen demand. A high OCR means higher interest rates, meaning people are less likely to take out loans or make purchases. By sucking demand out of the economy, price hikes are less likely. 

Davidson also said there have been suggestions LVRs should be removed or relaxed to help first-home buyers (FHBs), who often struggle to build up a large deposit, into the market.

"However, it isn't the RBNZ's job to be concerned if LVRs are hampering one buyer group over another. And in any case, the CoreLogic Buyer Classification series continues to show that FHBs' market share is actually holding up well."

Even if LVRs were loosened, Davidson said it's not a sure thing that borrowers may flood back into the market given record-low consumer confidence and high interest rates as a result of the OCR increases.

He said there could be a shift in 2024 when it's possible debt-to-income (DTI) ratios could be imposed.

"Again, the RBNZ should be independent from the politics," Davidson said.

"But to the extent that this shift in the policy mix might help FHBs a bit more (because they find it harder to raise deposits) and hampers investors a little (because they borrow at higher DTIs more often), this would no doubt please the current Government, if they were still in power at the time. 

"Ultimately though it's worth reiterating that the cost of finance is the most important factor. Continued high mortgage rates into 2024 would probably restrain housing activity and prices regardless of what was happening to credit policy."