How tighter lending rules impact the housing market

Westpac talks about how LVRs have reshaped the property market

How tighter lending rules impact the housing market

CoreLogic data has revealed that tighter lending rules targeting property investors have helped reshape the housing market.

When the New Zealand government introduced a 40% LVR in 2016, which meant investors had to have 40% equity in any new purchase, it led to a sharp decline in the market share of sales to investors. Since then, LVR rules were eased over 2018 and 2019, removed in 2020, then re-implemented in 2021.

Read more: LVR return receives mixed response from advisers

While LVRs certainly made a difference, it seemed the restrictions had to be at a high enough rate to impact sales volumes, Westpac reported.

“I don’t know what it is, but it seems something about 40% certainly makes it meaningful,” said Kelvin Davidson, chief property economist at CoreLogic. “We saw some evidence previously that 20%, 30% doesn’t have quite the same impact that the 40% does. We saw it in 2017 as well, such a marked change in the investor market share. Of course, this time it has been compounded by loss of deductibility, the tax changes that were made in March last year, but I’d certainly credit most of it to the 40% deposit.”

Over the same period as the regulatory changes, data showed that most other segments – cash investors, new to markets, and re-entries – were relatively stable. Data also showed that it was the first-home buyers who were filling the gap left by investors.

“It tends to be when mortgaged investors are finding it tougher, first-home buyers are able to access the market,” Kelvin said. “And partly that’s to do with when investors are hit harder by lending rules, first-home buyers aren’t hit as hard, so they can trade a bit more easily.”

Kelvin pointed to the types of homes being purchased as the reason why movers stayed stable while first-home buyers saw movement, Westpac reported.

“It’s sort of a little bit hard to prove, but certainly what people believe is investors and first-home buyers tend to be in the same parts of the market, tending to look at the same properties,” Kelvin said. “So, if one group has been knocked out a little bit by lending rules, the other group will be there to pick up the pieces. They are looking at entry level, three-bedroom houses. Similar properties, similar value bands, so it makes sense when one of those groups does tail off a bit the other steps in.”

The number of first-home buyers saw a significant drop in the past couple of months, however.

“Perhaps the most notable recent shift has been for first-home buyers, who only had a 23% share of purchases across Q1 as a whole, and 21% in March itself,” Kelvin said. “Apart from the lockdown-affected April 2020, the latest figure is the lowest monthly share for FHBs since the second half of 2017. This abrupt shift only started in January (their share was still 26% in December), clearly a reflection of November’s tightening to the LVR rules and December’s CCCFA law changes.”

At the same time, Kelvin said “movers” were having a bit of a growth period.

“Movers are another key group of interest, with these relocating owner-occupiers taking a 27% share of purchases in March and 29% for the first quarter as a whole,” he said. “That quarterly figure is the highest since 2016, and has been helped by more listings being available (making it more likely that movers can actually find a property they like), but also by their longer period in the market and increased equity base.”

With investors hit by decreasing yields, rising costs, and reduced tax benefits, is there an influx of investment properties hitting the market? Especially when we see higher-than-normal listings on the market. 

“There’s no real evidence of that,” Kelvin said. “If you look at overall listings, the total stock on the market has risen, so in general we have seen the market free up, there’s more properties available for sale, but that’s not due to a big influx of new listings. The new listings coming on the market each week or each month have been pretty normal for this time of year, but what’s happened is that sales have fallen away. You’re losing fewer through sales, you’ve got a steady flow of new properties coming on, and so the total on the market has a chance to replenish, so the mechanics of it is more due to a fall in sales rather than a rise in new listings.”

Despite that, Kelvin said he wouldn’t be surprised to see more investment properties hit the market later this year.

“It could change over the next six to nine months as perhaps some investors do start to think, ‘This could be as good as it gets,’” he said. “They might be having to top up the property each week to keep it breaking even, the scope for capital gains has gone down, and perhaps if they’re outside their Brightline period as well, so some of those people might look to sell. That’s something I’ll be keeping an eye out for this year.”