Ratio Gaga Part Two: why Loan to Value Ratio restrictions limits hurt first time homebuyers

Just over a year ago I blogged about Loan to Value Ratios (LVRs) and home deposits.

At that time the Reserve Bank’s Deputy Governor, Grant Spencer, was opening thinking about an LVR cap of 80% – requiring every house buyer to save up a minimum deposit of 20%.

This blog concluded that such a blunt tool was unfair and inappropriate:

One size doesn’t always fit everyone, or every condition. Sure, the current system is not perfect – but no system is. Many benefit greatly from paying a higher deposit. Others ought to be talking to their bank about getting one of those low low mortgage deals available now.

This year’s Budget carried the announcement that the government and Reserve Bank had signed a Memorandum of Understanding aimed at addressing risks to the housing market, and wider economy, as they emerged. You can read the whole thing here.

This blog shall focus on explaining the one weapon that’s been deployed already – the recently announced restrictions on LVRs – and detailing why they

a. Don’t work all that well, and

b. Hurt first home buyers most unfairly.

Hawera $279,000 Open2viewThe lower quartile price (a typical target for first home buyers) for a house in March 2013 was $280,000. This could get you a three bedroom, 190m2 house in Hawera…

Manukau $279,000 Open2view

…or a two bedroom unit in Weymouth, Manurewa.

What’s this new rule about?

The new LVR rule is what Gareth Vaughan describes as a “speed limit” rather than an outright cap. From 30 September the big four banks (BNZ, ANZ, ASB and Westpac) will be required to set aside extra money to protect themselves should those ‘high risk’ loans of more than 80% go belly up.

What’s the impact?

Banks, like any other business, aim to maximise profit. So this extra cost will be passed on to the mortgagee via a higher interest rate. Fewer people buy, demand for housing drops a bit and the market cools down a little.

Everyone is happy. Except first home buyers, who this change will hurt the most.

This group will have to choose between paying thousands more in interest now, or save thousands more for a higher deposit later – at which point they’ll likely be facing much higher interest rates anyway.

All in favour?

Barfoot & Thompson likes it as it could protect buyers from borrowing more than they can afford. The Federation of Family Budgeting Services largely agrees, having seen cases where some mortgagees have borrowed large and saved small. This Bay of Plenty Times editorial also sees the real estate market as a threat, despite that region’s average housing performance.

These arguments come from a well-meaning place. Like we said last year, however, many benefit financially from getting on the ladder now while interest rates are low. Force them to save more and many won’t be able to buy and will just give up and do something – or go somewhere – else.

LVR restrictions have failed in the past

Upon retirement, former Governor Alan Bollard gave an interview to Bernard Hickey where he described LVR restrictions as “the least desirable of the [options] we might look at.” When tried in the 1970s, distortions arose as people found their way around the rules. Indeed, it was what helped give rise to a number of our finance companies (remember them?).

Additionally, as Bollard pointed out to The Listener, in the old days people would get loans approved for their pets to circumvent the rules. On this basis alone Gareth Morgan should be opposed to LVR restrictions; his plan to have cats trapped and executed is already facing stiff opposition. With a capped LVR he would first have to cause these cats to default on their mortgage payments, then sell their homes via mortgagee sale, forcing them outside, and then have them trapped and executed.

Graeme Wheeler Reserve Bank

The Reserve Bank is ready for war on high house prices.

Those with low deposits are already paying higher interest rates

Check out the handy mortgage rate comparison chart on Interest.co.nz. There you’ll find different rates depending on whether you’re fixing, floating, living in a Christchurch red zone or – and here’s the point – the size of your deposit.

The BNZ homepage right now is advertising a rate of 4.95% for those with at least 20% saved up. Westpac offers a rate ten points lower for those with an LVR of less than 80%.

If there was an issue with high LVRs, the banks identified and accounted for it some time ago.

Are high property prices the fault of first time buyers?

Not really.

We have a shortage of supply, not an excess of demand. They’re not exactly one and the same; as we said two weeks ago Auckland is building nowhere near enough houses to keep up with population growth.

Punishing those on the bottom rung of the ladder won’t do anything to get more houses built.

Enough theory – how are real people affected by this?

The media have found some examples of how LVR restrictions will hurt real people.

Mark Bell, a 22-year-old apprentice builder from Hamilton, has to save twice as much for a house now. Meanwhile, Hamilton house prices have dropped 4% since April 2012.

The Nogaj family of Tauranga reckons it’ll now take them 20 years to save up a deposit despite Tauranga’s median price dropping from $343,000 to $327,500 in a year.

The common thread? People all over New Zealand are being punished for what is an almost exclusively Auckland/Christchurch problem.

Euon Murrell, Wellington region spokesman for REINZ, described the new rules as “a complete overreaction to a situation that’s been stumped along by Auckland and Christchurch.” His home region of Wairarapa, with an average house price in April of $246,000 (see page 14), is one of the most affordable regions in the country. Same rules will apply to them as in Auckland.

Change since 2007 Open2viewThis graph shows how much change there’s been in house values since the 2007 market peak. It’s very easy to see where much of the growth has taken place.

What do you think?

Are the new rules fair or are they picking on the wrong target? Regardless, will they dampen prices? And does your cat have time to catch mice AND deal with mortgage brokers? Let us know in the comments or over on Facebook.

Photos: New Zealand and Australia – the autumn collection

For this blog post, you may need a nice tall glass of quality wine.

Autumn provides the perfect backdrop for a wine or two. Photo by Guy Le Page in Barwon Heads, Victoria.

Aah, that’ll do nicely.

The eagle-eyed among you may have noticed that wine is of Australian vintage. Now, about that:

Open2view is a special company in that we’re New Zealand born and bred but have spread our wings to a whole lot of other nations too – Australia, Canada, the United States and the United Kingdom.

This means, from time to time, there will be posts here with a multi-regional flavour. This shift from a varietal site to more of a blend will, we assure you, provide you with a fuller-bodied experience.

To prove we aren’t straying far from our roots, here’s a photo of Mt Egmont/Taranaki:

Open2view Taranaki autumn

The above are just two of many photos sent to me at Open2view Global HQ when I asked the team for some autumn pics to show off this most underrated of seasons.

Check out the best of the rest below (click on any photo to get the gallery rolling), and see why no one does autumn quite as well as Australasia – and no one captures it quite like Open2view.

April Property Report: The NZ Music Month Edition

NZ music month 2013

Happy New Zealand Music Month everybody! Whether you’re working in the office, lounging in the living room or freezing on a beach somewhere, we hope you have some great Kiwi tunes blaring away.

Real estate news is thrilling enough not to need a soundtrack, but let’s see if we can’t come up with a suitable local song list all the same:

 

Prices: Cruise Control, or Slippin’ Away?

The latest data from Realestate.co.nz shows it’s largely business as usual.

The mean truncated asking price rose by just 0.5 percent to $447,275. That is still, however, a record high and 6% higher than a year ago.

Meanwhile the number of new listings on the market fell to 10,023, 21.5% less than March and 1.5% down on a year ago. Sellers are happy and confident… there just aren’t all that many of them.

Combine that with low interest rates, leading to high buyer demand, and we have the reason why house prices are pretty high at the moment.

Data released yesterday by the Real Estate Institute of New Zealand seems to back this up. 7104 houses sold made it the busiest April in six years. Again, Auckland and Canterbury take most of the credit, proving again that when it comes to real estate, they’re in their own Private Universe.

Che Fu

Still, living in the city ain’t so bad. 

 

Loan to Value Ratios: System Virtue, or The Male Monster from the Id?

Nearly one third of new loans are for houses with a Loan to Value ratio (i.e. how much of the house price you’re borrowing to buy it) of over 80% – and The Reserve Bank don’t like that very much.

Last week they announced that from 30 September the big major banks (ASB, ANZ, BNZ and Westpac) will have to set aside more capital for these mortgages. That is, the banks must have a bigger buffer in case any of these ‘riskier’ loans go up in Blue Smoke.

The desired outcome, from their point of view, will be higher interest rates and fewer people borrowing.

David Tripe, head of banking studies at Massey University, calls the move a “slap in the face” for first home buyers. With interest rates low it’s a good time for many to get on the property ladder. Higher interest rates, coupled with the need for higher deposits, makes it much harder to stop renting and start buying.

First home buyers are an easy group to punish, but what for? Price wise they’re usually house hunting at the lower end. These loans are Not Given Lightly either – applicants for loans with a high LVR often pay a higher interest rate anyway.

So are the new rules indeed grossly unfair, or will they protect many first timers from drowning in debt? It’s a topic worthy of its own blog post … so stay tuned for that next week.

Split Enz

A Te Awamutu family’s reaction upon finding out how much more they’d need for a house deposit.

 

Affordable housing: In the Neighbourhood, or Gutter Black?

Some hope for first home buyers who would rather not find themselves Out on the Street.

Last week the Auckland Council and the Government signed up to the Auckland Housing Accord. This acknowledges a lack of houses as the main reason for rapidly rising prices, and aims to achieve “increased housing supply and improved housing affordability in Auckland in the interim period until the Auckland Unitary Plan becomes operative.”

This won’t be before 2016; in the meantime the city needs to be building 13,000 houses a year starting yesterday. Developers need local and central government to come break their Chains and help them out.

The Accord agrees; the consent process will be streamlined (from an average of three years for greenfield developments to six months) in ‘special housing areas’. This will, everyone hopes, lead to 9,000 houses being built in the next year, 13,000 the following year and 17,000 the year after that.

We certainly hope that’s the case. You can read the whole Accord here; it’s ambitious, but a little ambition is exactly what we need.

 

Greater Hopes? Greater Expectations?

Enough Stuff and Nonsense (and flimsy song references) from us – what do you think? Are prices too high? Are first home buyers being unfairly punished? Does the Accord make you happy? Sing out below or on our Facebook page. And be sure check out nzmusicmonth.co.nz for plenty of news and local gigs info.

Big is beautiful: why Open2view is the ‘gold standard’ for real estate photography

Ask anyone involved in real estate who Alistair Helm is, and they’ll know. If they don’t, odds are they’re doing it wrong.

Alistair is the former CEO of Realestate.co.nz, the property website (aka portal) that displays virtually every single house for sale in New Zealand. Alistair, like Open2view, recognised early two crucial details about the real estate market.

The first point, that online would become the only source for the vast majority of homebuyers, has consequently been proven absolutely correct.

Having help build realestate.co.nz into the behemoth it is today, he is now showcasing his talents on a global scale. Recently Alistair became CEO of Property Portal Watch, which is the website to follow to keep up with developments in online real estate.

As such, the site is “specifically designed to serve the owners and operators of property portal sites” – but one recent article from Alistair deserves a wider audience.

Property Image Sizes, Getting Bigger – Catch the Trend emphatically makes our second important point: that without good, preferably professional photos, your listing is dead in the water.

Alistair reports:

Recent research has reinforced what most real estate agents and for that matter property portals already knew, property shoppers look first and most often at photos.

The research study undertaken by the Institute for Behavioral and Experimental Real Estate at Old Dominion University at Norfolk, Virginia found that 95% of people, when viewing real estate websites view the first photo for around 20 seconds.

Photos sell property; and this study only reinforced this fact by demonstrating the lesser importance of agent descriptions as part of the listing. The researchers found that a staggering 4 out of 10 people completely ignored the agent spiel.

The whole academic paper Alistair quotes can be read here. I’ll save you a headache; one of the authors, Professor Michael Seiler, summed the findings up perfectly: “without an eye-catching photo, the battle is lost before it begins.”

The first photo is the key weapon in winning the battle. Not only does it have to be beautiful, it also helps significantly if it’s big.

Alistair explains:

The future is becoming clearer in regard to the viewing experience for real estate. Mobile, or to use a better expression, hand-held devices, being tablets and phones or just phablets will be at least half of all viewing for property; the other half may well end up being viewed on ever bigger screens. It is likely that the traditional PC monitor will be replaced by the flat screen TV as property buyers sit back on the couch and browse property on their 60” High definition LCD TV.

So how big are most real estate photos? Alistair has done some homework and found the largest listing page images on realestate.com.au at 772×579, followed by Sweden’s Hemnet (690×460) and US site Trulia (640×427). The smallest? Immoweb.be (“Belgium’s leading property website!”) at a microscopic 145×145.

Immoweb tiny images

Anyone home?

All far smaller than the typical computer monitor, let alone those smart TVs that will soon be all the rage.

So whom do you turn to for the world’s largest, high definition, professional photos?

Open2view, that’s who!

Alistair gave this wonderful endorsement of what we do:

In reviewing the global portals I was torn as to the inclusion of the site of Open2View… They are not a portal in the true sense of the term of aggregating listings from multiple customers and earning income from subscription and property advertising. However there is no doubt that their website is one of the most immersive viewing experiences of any property website I have ever come across.

They make the property image the hero – front and centre with everything else pushed back out of the way – listing photos are 960 x 640 with the overlay switching to full screen at 1135 x 750 – a staggering experience coupled with professional quality images. Whilst not a true property portal, Open2View for me certainly sets the gold standard for online property images. [Emphasis added]

Even better – if your screen’s big enough our fullscreen photos go all the way up to 1600×1066. No matter how you look at them our photos are bigger, brighter and better than anywhere else on the web – and now you don’t have to just take our word for it!

Fullscreen Open2view listing example

Just click the Fullscreen icon on any of our listings for a fully immersive househunting experience.

Neither the study’s findings, nor Alistair’s words of wisdom, should go ignored. Our advice to house sellers: if you want your house looking its very best, tell your agent to contact the Open2view team. House buyers, check out Open2view first – you won’t get a better viewing experience anywhere else.

And while you’re online – check out Alistair’s other website, Properazzi, for more news and views on the real estate market.