By David Hargreaves
The latest calls by the Property Institute for first home buyers to be exempt from LVR restrictions fall into the usual category of such comments; well intended but naive and simplistic.
When the Reserve Bank introduced LVR restrictions in 2013 there was an unspoken truth. If you target people attempting to get a mortgage with a below 20% deposit then you are mostly targeting first home buyers. That’s the unspoken reality.
The RBNZ’s concern was that banks were starting to really ramp up their high LVR lending. Obviously the more bank customers that are highly exposed to a potential downturn in the housing market, then the bigger risk such a downturn poses to the banks and to the financial stability of the country.
The LVRs have in the past three years therefore served the useful purpose in strengthening the overall ability of banks here to withstand a sharp house market correction.
The unintended consequence though is that first home buyers have been increasingly locked out at the expense of investors. So, we’ve seen the proportion of house sales going to investors rise quite sharply in that period.
Something does need to be done to give would-be first home buyers that first leg-up on to ‘the housing ladder’. But it’s not as simple as the likes of the Property Institute would want you to believe.
It’s dangerous in the extreme to start saying that because NZ’s not had a big collapse in housing values that this simply couldn’t happen. I certainly believe that the RBNZ’s original reasons for concern about banks’ high LVR lending remain valid.
We now have of course, starting officially from next week, nationwide investor-specific LVR restrictions. Whether that will truly slow investors down and tip the playing field back toward the first home buyer I would, however, doubt.
So, what to do?
No divine right
I’ve always felt there’s a slightly uncomfortable attitude afoot that it is some sort of divine ‘right’ for people to own their own home. I think that’s a fundamentally wrong approach. It should be considered a privilege. But nevertheless it should be an ACHIEVABLE privilege. Stick it too far out of sight and you disenfranchise the young and face potentially substantial social problems down the track.
But I don’t think that a blanket policy of saying: ‘Here’s a 100 per cent mortgage for you’ just because you are young and doe-eyed is the right way to go either.
Going back many years I don’t recall it being particularly easy to get large mortgages as a first home buyer. Certainly, when I bought my first home in Wellington in the early 1990s I did so with a just a 13% deposit. But I also remember it being a royal pain. The only bank my wife and I (despite both earning well above average wages) could get a mortgage with ultimately was the now long-since absorbed Countrywide. And they had to get head office approval. And we got the nod from the bank literally an hour before our conditional offer on the house was due to lapse…
I’m not asking for a medal. I’m just saying that nothing should be treated as a God-given right.
The most exposed
I don’t accept that there’s no chance the New Zealand housing market could experience a substantial fall. And I agree with the RBNZ basic case that the most exposed to such a fall would be the high LVR people – and yes, a preponderance of them would be first home buyers.
So, is there a more creative solution here – one that the Government could get involved in? The Government’s mostly tried to avoid getting its hands dirty on this issue by trying to convince us that the problem can be solved by ramping up the supply of houses. Trouble is, we can all see, that is not happening fast enough.
Therefore, the issue of some sort of sustainable policy toward young people and giving them the chance, the encouragement, to buy their own home, becomes ever more crucial.
I’ve spoken out before over the preferential tax treatment that property investment gets in this country. It means that from an investment perspective buying houses is a ‘no brainer’. If the Government was to, for example, remove the ability to claim tax deductions for property investment losses, this would tilt the balance somewhat in favour of people at least considering other investment asset classes than property.
But first homes are different.
More than an investment
While a first home is technically an investment, it’s much more than that for most people. And I’m sure most first home buyers don’t really think of the ‘investment’ perspective. It’s a place to live. To create a home. To create a family. It’s deeply rooted in the New Zealand psyche.
Could the tax system be used – carrot and stick fashion – for first home buyers? Would there be, for example, a way of creating a means by which those people who don’t have 20% deposits could ‘insure’ sums of money that are borrowed above 80%. Perhaps some sort of tax deductibility that would enable these people to ‘buy’ insurance that effectively gives them a 20 deposit, albeit that some of that 20% will be borrowed? Just for example a couple puts up 10% deposit and then borrows another 10% which is fully insured – and paid for with a tax deduction. Then later when either the couple have repaid sufficient or the valuation of the property has risen, the insurance ends, the tax deduction ends, and on we go.
Granted, this is me thinking out loud, but If you could do something like that, something that ensures the bank still has in effect a 20% deposit, then you don’t need to worry about exemptions are anything like that from LVR rules. This would be carrot-and-stick. It doesn’t give anybody an assumed right. But it does give an incentive.
The upshot is the Government’s got to get its thinking cap on now. It has the ability to create an environment in which the young would be encouraged to believe they can buy a house. It needs to get busy. The social cost of disengaging significant portions of the young is potentially high.