That nightmare for first time homebuyers we’ve talked about? Seems it’s about to become very real.
The Reserve Bank has given its strongest hint yet that restrictions on loan to value ratios are imminent. Said Stuff this afternoon:
A banking source said banks were told on Friday to prepare for restrictions which will impose a 12 per cent ”speed limit” on their total new lending going on low equity mortgages.
That will effectively halve the amount of high loan-to-value (LVR) lending that the banks are currently doing, making it much harder to get a mortgage with a deposit of less than 20 per cent. [Emphasis added]
According to Bernard Hickey, of the $9.2 billion that was lent out in mortgages in the year to May, about 30% of this ($2.76 billion) was in LVR categories of 80% or more. The planned new rules would mean no more than 12% of new lending could be to this category.
The result? A big drop in new lending, especially to first home buyers who are, generally, the ones who have smaller deposits.
There was some talk that first timers could be exempted; at least that was Prime Minister John Key’s hope. Ultimately that decision is not up to him or any other politician; the Reserve Bank Governor, once given the tools by government, gets to decide if, how and when they are to be used. Graeme Wheeler is no fan of loopholes.
End result: it’s going to suddenly get a lot harder for first home buyers – consisting mostly of Generation Y folk – to get on the property ladder.
We have blogged several times about how this isn’t the most fair, or effective way to cool the heated real estate market – and the effect on first home buyers will be worse than we expected. We hate to sound like broken records, but if more proof is needed about the low success rate of LVR restrictions here’s some from Israel, courtesy of BNZ economist Tony Alexander and the Wall Street Journal Asia:
Last October, it (The Bank of Israel) set the minimum down-payment at 30% for most home buyers, and at 50% for investment properties…Israeli home prices rose 3.2% in the four months ended in March…The lending restrictions can’t overcome the forces of supply and demand: Israel’s population is growing at a much faster rate than new homes are being built, so home prices just keep climbing… “Evidently the measures we have imposed have not been strong enough to reduce the demand for housing sufficiently to stop prices rising,” the former central banker Mr Fischer concedes.
You cannot resolve a supply issue by attacking demand.
An official announcement is expected in the next few days, and the speed limit could come into effect with as little as a couple weeks notice. This would be to prevent an influx of new home loans before the changes take effect.
What do you think – are the new lending rules fair, or foul? Have your say below or on Facebook.