Larger Deposits Now Required!
To protect the property market from a drop in house prices, The Reserve Bank is wanting to see larger deposits .They also plan to tighten Loan-To-Value Ratio Restrictions for owner-occupiers as they come down hard on low deposit home loans.
Reserve Bank deputy governor Geoff Bascand said the proposal was prompted by soaring house prices.
In an article written by Good Returns, Bascand told them that our analysis indicates that house prices are above their sustainable level, and the risks of a housing market correction are continuing to rise. The plan for tightening Loan-to-value ratio will over time help reduce the number of highly leveraged borrowers and help to build resilience in the financial system.”
The Reserve Bank say that any new rules could come into effect as early as the 1st October 2021. They are aware of the real concerns and that the new rules could make it harder for first home buyers, but in saying that it, the new rules should also flatten house prices. They admit that they are targeting first home buyers, as they are the people buying houses with lower deposits and therefore, most at risk if house prices do fall. That is why they are wanting larger deposits.
The Reserve Bank acknowledged that tightening Loan-to-value ratio on owner-occupiers will reduce the number of first home buyers with low deposits who are able to enter the housing market in the short term. However, reducing house price inflation will improve affordability for first-home buyers.
I am not confident that these actions will make much of a difference to house prices as they have said this before and yet little has changed. While we continue to have a housing shortage, house prices are unlikely to drop, and instead investors will purchase these properties making it impossible for first home buyers to get onto the property ladder.
On a good note, exemptions to Loan-to-Value Ration, such as the Kāinga Ora First Home Loan and loans for new builds, would “continue to support access for first-home buyers”.
Consultation Document
The Reserve Bank have issued a consultation paper, however they have already decided what they are doing. They will make changes regardless of what the outcome is, but maybe if they have enough people who voice their concerns, they may listen.
A consultation document on the Loan-to-Value Ratio Restriction changes can be found here. They are currently consulting and asking for feedback.
Address submissions and enquiries via email to: macroprudential@rbnz.govt.nz and use the subject line: “LVR Consultation September 2021”
Addressing The Problem
In New Zealand we have a shortage of homes for people to live in. The real problem with house prices and affordability is the market forces of supply and demand, and it always has been. Introducing the requirement for a larger deposit will not do anything to fix this problem.
Shortage of rental properties and that is seeing rent prices sky rocket. The Government has made changes to deter property investors and that has seen rents be forced to even higher levels and less properties for renters as well as a surge in emergency housing. With the massive failure of KiwiBuild the Government has also been in the market buying houses that were built for first home buyers, meaning less houses available and pushing house prices up.
We have a shortage of houses suitable for first home buyers. The houses are too expensive and this comes down to the land costs and the build costs, plus of course the lack of supply mentioned that forces house prices up. The Government need to make the development of land more affordable so that the section costs are lower and they have the ability to do this even if they make it specific for first home buyers as in the Affordable Homes Programme that already exists.
Build costs are too expensive but prices could be reduced if there was the ability to build houses in factories instead of onsite. A major issue for this is the ability to get finance for these types of prefabricated houses as the banks provide finance with a mortgage attached to the land, not to a house in a factory. There needs to be some though around how the banks can do this and it may require the Government to step up with some form of guarantee. It is something that needs to be looked at as it works in many places around the world and could work here too.
Consenting builds is too expensive. You see a building company with a standard house design and they need to get a consent for each of those houses that they build. Why can’t they get one approval for the house and then they could build multiple of the same design without the need for multiple consents. This would save money and time.
Apartments should be the ideal first home. You will generally find that apartments are cheaper than townhouses or houses as you are not paying for the larger amount of land. One of the problems with apartments has been that the banks require a bigger deposit and therefore it has been too hard for first home buyers to buy an apartment. There has also been the large number of apartments that have had weathertightness issues which have put people off. There needs to be some thought on how to make apartments easier to buy for first home buyers and that could come in the form of a guarantee provided by the Government too.
The Government can step up to help fix the housing problem in multiple ways. Leaving it to the Reserve Bank to fiddle with the lending rules has not helped in any way. There are ways that the Government could help with guarantees and assurances which should realistically have very little cost if they are designed correctly.
If these fundamental supply issues are not dealt with then I fear that house prices will continue to increase while first home buyers will continue to struggle to get onto the property ladder, especially if bigger deposits are introduced.
