By Greg Ninness
Mum and dad investors buying residential investment properties in Auckland are likely to be most affected by the new loan-to-value ratio (LVR) mortgage lending rules due to come into effect next month.
An analytical note by Hayden Skilling issued by the Reserve Bank has analysed the impact of the restrictions on bank’s high LVR residential mortgage lending introduced in October 2013. These have restricted banks to doing no more than 10% of their mortgage lending to borrowers with deposits or equity equivalent to at least 20% of the house price.
The note says although the policy initially dampened the housing market, prices began taking off again late last year and that much of that increased activity was driven by investors, rather than owner-occupiers moving house or first home buyers.
“We find that increased houisng market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit,” the note says.
It also found that most of the extra investor activity came from smaller rather than larger investors.
“The primary driver of rising investor activity since October 2013 has been an increase in purchases by smaller investors (those with between two and four properties), as opposed to portfolio expansion by larger investors,” the note says.
“This is particularly the case in Auckland, and suggests that smaller investors have been leveraging up in pursuit of capital gains.”
This group was heavily reliant on credit to make their purchases, so they were the ones most likely to be signficantly impacted by the new, tougher LVR restrictions on Auckland residential investment properties when they come into effect on November 1. The new rules mean borrowers will generally need a 30% deposit for a mortgage loan secured against Auckland rental property.
However, restrictions outside Auckland will be eased from November with banks able to make up to 15% of their new mortgage lending to borrowers with LVRs exceeding 80%, regardless of whether the borrowers are owner-occupiers or residential property investors.
“Given that the LVR policy is likely to be more binding within this relatively over represented group (Auckland investors), the incoming changes to the LVR restrictions might be expected to have a significant dampening effect on Auckland housing market activity and house price inflation,” Skilling’s note says.
The note also found that existing LVR restrictions have not caused a significant increase in cash purchases (made without a mortgage) or in the volume of mortgage lending by non-bank lending institutions.
To read the Reserve Bank’s full analytical note, click on this link.