There has been a loan-to-value ratio restriction in place for Auckland investors for quite a while now. It was a minor change, issued by the Reserve Bank of New Zealand (RBNZ), which limited the amount of lending to investors in the hottest property market in New Zealand. However, it looks like it wasn't quite enough, and the RBNZ is gearing up to make even more drastic changes. Here's what you need to know.
The issue of affordability
If you have been buying Auckland property as a means to build wealth, you'll know that it has been necessary to supply a 30 per cent deposit rather than the more usual 20 per cent. While these macroprudential measures certainly put a slight brake on the investment sector (translating to a small moderation earlier in the year), people quickly learned how the new rules worked and prices continued to rise not only in Auckland, but in the regional markets of Tauranga and Hamilton as well.
This has proven to be a real headline-spinner, as people all over the country bemoan the lack of affordability in a multitude of areas. You might be surprised to learn that affordability has actually improved over the last year, according to the Massey University Affordability Index. This is mostly due to the lower interest rates, as we sit as a historically low official cash rate of 2.25 per cent.
However, this does have it's downsides. Westpac has released a report on household debt, warning that it has been rapidly growing – likely due to the low interest rates and the increasing popularity of property investment as a pathway to a secure retirement. They discuss that this build-up is unlikely to result in the toppling of the economy, due to the nature of tighter lending practices in recent years – but it is these already-tight lending practices that the RBNZ is planning to adjust.
The times are a-changin'
The RBNZ is also currently in talks of implementing debt-to-income ratio limits.
You know the history and the reasoning, so let's get down to the nitty gritty. The RBNZ proposes a cap, to take effect in September, on the amount of lending that investors across the country can leverage with a deposit of less than 40 per cent. Only 5 per cent of bank investor lending will be allowed to consist of any loans with less than this required capital. Owner-occupiers will also be capped, with only 10 per cent of lending being allowed at a deposit less than 20 per cent.
This could cause a serious headache for those investors who want to rapidly expand a portfolio, or even step into the market for the first time. However, there are some exceptions still in place. If you are planning to build a new home, rather than buy an established property, no such caps will apply to the banks. This is likely in place to help push investors towards building new homes rather than buying them – this could well be an option for people are aren't able to facilitate a 40 per cent deposit.
Furthermore, the RBNZ is also currently discussing implementing debt-to-income ratio limits, much like the UK has. That consultation will be concluded on the 10 August, and could mean that there will be further prerequisites required for anyone who wants to jump onto the property market. Time will tell what kind of effect these new limits will have, though we may very well see a similar situation after the most recent changes – a short blip, then a continued rise.
If you're interested in getting involved in the investment property market before these restrictions come into effect, make sure you get in touch with us here at Goodlife Financial Advice!
Here's to your financial independence!
Authorised Financial Adviser / Investment Property Expert
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