Feature article

What looser LVRs mean for the housing market

An explainer on LVR loosening and what to expect

8 May 2023

It’s starting to feel like maybe the testing times of rising interest rates, restrictive lending rules, inflation concerns and hesitant first home buyers and sellers, might be coming to an end. Maybe.

On April 26, the Reserve Bank announced its proposal to loosen loan-to-value ratio (LVR) restrictions on high-LVR lending from June 1 to the pleased surprise of the housing market. The current LVR settings were put in place in November 2021 to set a “speed limit” on how much new low-deposit lending banks could do.

The proposed changes to come in in June mean that the banks will be able to take on a higher proportion of high-LVR lending. The limits on banks to accept loans for owner occupiers of above 80% LVR, will go from 10% to 15%. Meanwhile, the bank is easing the 5% limit for loans with LVR above 65% (up from 60%) for investors.

The central bank’s reasoning behind the proposed LVR changes – is that constraints on high -LVR lending, rather than reducing risk of financial stability, were stopping “creditworthy borrowers” from getting the finance they needed.

The Reserve Bank told the market that the large correction on national house prices was over, and that lending conditions had tightened significantly as banks’ debt servicing assessments allowed for higher interest rates.

One of the reasons they’re easing the limits is banks’ debt servicing test rates have naturally increased as actual mortgage rates have risen, says ANZ. The current test rates are now not far off double digits. This reduces the amount that can be borrowed and so there’s less of a role for these limits, explains Sharon Zollner, chief economist at ANZ.

How has the LVR loosening decision been received?

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.

Who will the LVR changes affect most?

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.

How will investors react to LVR changes?

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

Will this be the only loosening of LVR limits?

And there may be more to come. In March or April, 2024, the Reserve Bank is expected to introduce debt-to-income ratios (DTIs) where it applies debt serviceability restrictions to banks’ mortgage lending. These are likely to be set at around six or seven times people’s incomes, says Loan Market’s Bruce Patten. (A DTI is calculated by taking the yearly income of the applicant and then banks multiply it by X to determine the maximum amount a customer can borrow.)

The mortgage broker says he wouldn’t be surprised if a further loosening of LVRs happened around the same time as the DTIs come in depending on the housing market.

“This is just the beginning of the loosening cycle,” says the senior mortgage broker.

When LVRs were first introduced in 2013, the limits went from 10% to 15% and to 20%, and Bruce could see them doing the same thing in 2024, he says, if the market goes down too far. He thinks a 20% limit would be a comfortable level. A discussion might also start next March/April about lowering interest rates too, he suggests.

ANZ is predicting interest rate falls in the second half of 2024, says Sharon. Others are predicting sooner in the year The economist warns that if the housing market takes off again, the Reserve Bank won’t sit and watch.

ANZ will be closely watching lending stats to gauge how much unmet demand for high-LVR lending is out there.