15 Sep Why we won’t continue to see a property boom
There’s a lot of chatter out there around the possibility of another upswing in the property market.
However, the reality is more likely that the market will level out and remain that way for some time.
What’s different about this current climate
This time last year, the property market was primed for a boom. With the uncertainty of COVID-19 shadowing over the entire economy in mid-2020, the Reserve Bank of New Zealand (RBNZ) was quick to drop the OCR and pump money into the economy to encourage consumer and business spending. With the low OCR, came low interest rates and a removal of the Loan-to-Value (LVR) restrictions, meaning it was a ‘free for all’ for those able to purchase property.
Fast forward to August 2021, just before the current lockdown, it was highly anticipated that OCR will start to creep upwards (increasing interest rates) and strong signals from RBNZ that they will be tightening up, seeing that the economy had bounced back better than expected and inflation running a little higher.
RBNZ stopped their Large Scale Asset Purchase (LSAP) programme, also called Quantitative Easing (QE) which is their money printing scheme on 23rd July 2021, earlier than scheduled. They have also brought Debt-to-Income (DTI) restrictions into their toolkit but have not yet implemented them.
Despite the lockdown, RBNZ are still looking at ways to rein in the property market, particularly in ways that affect low deposit buyers, in other words, First Home Buyers. According to them, this group of buyers will pose a greater risk to banks and to the economy.
The new proposed changes to LVRS
RBNZ announced last week their plans to consult on further restrictions. They’re looking at two options:
Reducing the lending pool for high LVR borrowers
With the majority of banks receiving funding through RBNZ, they are bound by the restrictions imposed by them. Although it’s widely understood that you need a 20% deposit to purchase property, there is an allowance for those with less than 20% deposit to still purchase a home, these are called ‘speed limits’. Currently a main bank can lend up to 20% of its funding to those with less than 20% deposit (or LVR greater than 80). However, RBNZ is looking to reduce this speed limit to 10%, this means that although first home buyers are able to purchase a home with a 10% deposit, there might not be any bank that will have enough money to lend to them.
Increasing deposit requirements for owner-occupiers
As mentioned above, a 20% deposit is a strong position to secure funding with a bank, however, RBNZ are proposing that this be increased to 25%. That would mean, if you wanted to buy a $1m home, you would need to come up with an additional $50,000 to secure it with a deposit of $250,000. This would affect any owner-occupier looking to buy.
Will the property market crash?
We believe not. We just don’t think it’ll carry on growing at the pace that it has over the last 12 months. We’re still seeing a shortage of supply of both listings and material for construction along with confidence in the market, but money is getting harder to come by.
None of the newly proposed changes mentioned above are likely to affect investors, as there’s no talk of a change in LVR for them (currently 60 LVR so deposit requirement of 40%). However, this is likely to wipe out a lot of first home buyers with a deposit less than 20%.
In a nutshell, this time last year you could translate messaging from RBNZ as ‘Go spend money!’, now it’s more like ‘Don’t go crazy’.
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Lucia Xiao | email@example.com