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LVRs and the bigger picture

By David Kneebone on 2021-02-17


With the curveball announced on Valentine’s Day of a change in alert levels, at Lodge City Rentals we have made a quick, smooth transition back to Alert Level Two operating restrictions.

With a focus on maintaining the health and wellbeing of our staff and customers, we have physical distancing and contact tracing measures in place around our regular rental viewings, property inspections and maintenance, and in our offices.

Despite the upheavals, I think we know from experience now that any lockdowns or stricter Covid-19 rules are unlikely to dampen the hot property market.

Earlier this month we saw the return of loan to value ratios (LVRs), reimposed by the Reserve Bank after being suspended at the start of the pandemic. The re-introduction of LVRs restricts the amount of the loan compared to the value of the property, so that buyers need a certain level of deposit according to the ratios above.

From 1 March, the ratios will be set at 20 per cent for first home buyers and 30 per cent for property investors, with the lending to property investors rising to 40 per cent in May.

The Government has also signalled a crackdown on property speculators, and proposals to curb house price inflation will be going before Cabinet shortly, with demand-side measures to come in late February.

In this blog, I’ll discuss my thoughts on how LVRs may help to cool the market, but that until the supply side of the problem is addressed we won’t see any large-scale changes across the market.

LVRs: only part of the solution

The Government admits LVRs are just one measure, and while it may cool the market somewhat I think it’s safe to say it won’t be the silver bullet many are looking for. Experienced investors with good equity (much of which is likely from the last 12 months) will be able to meet the 40% level quite easily, so they will still be looking to buy.

Essentially, until the supply side of the housing market’s issues are addressed we are only ‘tinkering.’ What the market needs is more construction and new homes.

I see examples every month where our owner clients involved with new builds jump through all sorts of hoops to get small developments underway. Personally, I’m dealing with some ridiculous red tape simply to add a few studio units to a complex.

The recently announced overhaul of the Resource Management Act (RMA) will hopefully improve the situation, with the Government planning to split it up into three pieces of legislation. The one most relevant to improving the housing situation is the Natural and Built Environments Act, focused on land use and environmental regulation, along with the Strategic Planning Act and Climate Change Adaptation Act. However, it is tentatively planned for the legislation to be passed by late 2022, so it could be up to three years before we see the changes come into play.

So the fundamental issues pushing up house prices are still very much around. The continuing very low interest rates combine with the limited investment opportunities for those looking for a stable income, to mean property remains the most attractive option for investors.

The brain gain with ex-pats returning that I’ve spoken about before also continues, driving population growth with more people coming than going to our ‘safe haven’ in New Zealand.

At the core, it goes back to the simplest economic theory of supply vs. demand. Once the balance is tipped there, we might start to see some significant changes. Over the coming months I look forward to discussing the market further, and enjoy identifying and sharing investment opportunities with our clients.

See you next month,

David Kneebone

Director, Lodge City Rentals


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