By Frank Newman on 29th November 2013
The loan-to-value ratio (LVR) policy introduced by the Reserve Bank on 1 October is beginning to bite.
The NZ Herald reports, “Of the $4.47 billion of new mortgage lending last month 12.8 per cent was at a loan-to-value ratio (LVR) of more than 80 per cent, down from 25.5 per cent of the $4.7 billion lent in September.”
Low deposit lending is likely to fall further as banks adjust to meet the Reserve Bank’s 10% requirement by the end of March 2014. Basically the new regulation caps bank lending to those with a deposit of less than 20% to no more than 10% of its total new residential lending. If a bank doesn’t comply it will be deemed to be in breach of its registration and may be subject to varying degrees of enforcement.
Off-setting the reduced lending to low deposit borrowers, banks have increased their lending to borrowers with an LVR of less than 80%. This highlights a significant shift taking place within the mortgage lending market – less money is being lent to low deposit borrowers and those borrowers are paying a premium interest rate (about 0.75% more). This is leaving banks with more money to lend on lower-risk residential housing.
In this respect the policy is having exactly the effect the Reserve Bank intended – reducing the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly-indebted home owners. Clearly the Reserve Bank took the view that having +25% of new mortgage lending going into low deposit loans was excessive and putting the banking system (and the economy) at risk.
The downside is the impact on building (with some house companies reporting a sharp decline in work), and first home buyers, (who typically have high debt during the early years of home ownership), are not able to gain access to mortgage money or afford the higher interest rate.
It remains to be seen what impact the measures will have on house prices. Overseas indications are that it will dull house price rises rather than put them into reverse. According to the Governor of the Reserve Bank, “While new for New Zealand, such restrictions have been introduced in 25 countries, and are currently being deployed in Canada, Israel, Korea, Norway, Singapore, and Sweden. Most countries adopting such restrictions prohibit high loan-to-value lending. We have opted for a more flexible approach, which still allows banks to do some high loan-to-value lending. Nor should such moves be seen as permanent. Restrictions will be removed when there is a better balance in the housing market and less risk that their removal will reignite high house price inflation.”
Still on matters to do with banking, the ANZ’s latest Property Focus report has an interesting commentary about regional rental yields, including a time series showing yields on investment property by region. (See table.)
In Northland, for example, the rental yield (gross rental income divided by the property’s market value) was 6.5% in 1992 (a historical low point in property values) and 4% in 2007 (the peak of the last boom). The yields currently average 4.7%.
The table highlights some important points:
- Rental yields generally reflect the capital growth prospects of a property market. Regions with little or no prospect of capital gain have higher rental yields as investors’ off-set poor capital growth with rental income. The table is therefore a fairly good indicator of capital gain expectations in each of the regions.
- Lower interest rates have resulted in a lowering of income yields on investments generally. This sends a clear warning signal – investment values (including house prices) will come under downward pressure should interest rates rise (as is likely to commence in the first half of next year).
The most likely scenario is that the next property cycle will see house prices will remain flat in dollar terms, while rental income will increase with inflation. As a result rental yields will rise.