On 1st October the Reserve Bank brought in new speed limits on low deposit loans, meaning that going forward, banks in New Zealand may only approve 10% of all new lending in this low deposit space (being applications with an LVR of 80% or more). The reality is however, that banks are not approving any low deposit loans (or very few to say the least) until all of their existing pre-approved loans in this space have expired – which could take up to six months. Some banks have taken it further and cancelled all existing pre-approvals for low deposit loans as they are scared of contravening the new policy, as if they do they run the risk of losing their banking licence.
In October we didn’t see a drastic effect as a result of the new policy as most of our pre-approved low deposit loans were honoured. This month however, the effect seems to be significant with applications for low deposit loans drying up as the first home buyer comes to the realisation that they have been all but shut out of the market.
The first home buyer does have access to 90% loans through the Welcome Home Loan scheme and while this has recently been improved, it still seems quite difficult to qualify for this type of loan due to the inflexible rules in place. If you miss the boat on one of the qualifying criteria then that is your chance lost. An example of this is being in your current job for less than 12 months. This policy seems strange to me as people will often change jobs for betterment and tend to stay within the same industry – so what is wrong with that risk analysis?
The upshot of this is that the first home buyer is not venturing out to open homes like they were, as they believe they have little chance of getting a loan unless they have a 20% deposit. It is really the first home buyer group that is affected by these changes, as many second and third home buyers have enjoyed good capital growth and therefore have the required deposit. The other group that appears to be most affected is the new build industry, as turn-keys now require the full 20% deposit to be assured of completing settlement typically six to nine months later. As competition diminishes, the benefactors of the Reserve Bank policy are the investor group. This of course is good news for the members of the CPIA.
Coming in to 2014 and election year, this LVR will be hot election topic as all Kiwis believe it is their right to the 1/4 acre dream (more like 1/8 now). I find it ironic that last week’s Finance Stability Report commented that the banks in New Zealand are well capitalised, had strengthened their funding base and bad loans continue to reduce. Profits continue to rise. It begs the question why this policy has been introduced when the financial system is so strong. Yes, Auckland and Christchurch property markets are over heated but this hasn’t weakened the banking system.