Bear with us, we are getting somewhere with this analogy. Just as the Stay Puft Marshmallow Man laid waste to New York City, sky-rocketing housing prices in Auckland are also dashing the dreams of first home buyers and everyday ma-and-pa investors. Buyers are literally fleeing the city, for real.
In response, the Reserve Bank Governor Graeme Wheeler (our designated PriceBuster) is reported to be considering placing a LVR restriction on Auckland property buyers. Specifically, the restriction will require buyers to put down a bigger deposit than those who purchase outside of Auckland. The rationale is simple, the harder we make it for people to buy property, the slower prices will increase as demands diminish with the buyer pool.
Is Mr Wheeler’s proposal as awesome as the Bill Murray’s unlicensed nuclear packs? If implemented and enforced, will the LVR restriction literally be kicking arses in Auckland and taking names? How will property investors and home buyers REALLY be affected?
The APIA Elves weigh in
David Whitburn, APIA Head Elf
“The LVR restrictions will have the impact on making it harder for first home-owners and investors to buy properties in Auckland, as they will need to contribute more equity, and many will be unable to do this. It will slow growth in the market prices, and assist wealthier overseas and New Zealand resident buyers to pick up properties at good prices. There will be winners and losers with this policy and it is not the holy grail that the Reserve Bank hope for to quell the rising Auckland Housing Market. A multitude of factors drive the prices – not just the financing environment.”
Andrew King, speaking from the Mothership (i.e. New Zealand Property Investors’ Federation)
“The LVR restriction being considered by the Reserve Bank could be seen as protecting some people from themselves. In the four or so years up to 2008, banks were aggressively promoting home loans, often without requiring any deposit from the purchaser. This definitely had an affect on increasing demand, but it was also very risky for the banks and the home buyers.
This type of lending may have also lured some people into property investment, who really could not afford it.
The NZPIF thinks that restricting the LVR ratios will restrict risky investment decisions providing an element of consumer protection, even if it is protecting them from themselves. It may also slow down property price growth, but it will not eliminate it completely.
Many rental property investors will have sufficient equity in their own home that increasing the LVR requirements will not stop them from effectively borrowing 100% for new property purchases.
Considering the general economy, higher LVR requirements also provide the Reserve Bank with a tool that can specifically target any excesses in the property market without incurring the negative impact on interest rates. This would be good for business and the overall New Zealand economy. It would also be good for rental property cash flow, as mortgage interest rates may not need to be raised as much by the Reserve Bank should the property market take off.
So in summary, there are good and bad points. Raising LVR requirements will not affect the majority of rental property investors from making new purchases, however it may restrict the level of future property price growth.”
Ammon Acarapi, our very own property Sun Tzu
“As we know the key fundamental for property values is supply and demand, so sure any such policy designed to slow down the demand for property would hold property values – to what degree however would be debatable. The biggest impact would be for first home buyers and younger investors who haven’t built up equity in their portfolios buy holding property through previous property cycles.
More experienced, well-heeled investors may pick up the slack as there is still a real problem with the fundamental under-supply of properties to house those people who most need it i.e. lower income Kiwis. Rents would continue to increase as supply is further curbed, making property investment even more attractive to those who can put the deposits together to purchase properties.
This policy would not solve the real problem which is the under-supply of affordable properties. Policies designed to increase the supply of property however would have the desired outcomes of both holding house prices and providing housing for those who need it. In my opinion this is where policy makers should spend their concerted efforts.”
So there you have it
It would seem that managing housing prices is a multifaceted issue one which cannot be easily solved or circumvented by one single policy. We say it is time to get back to the drawing board and come up with a more comprehensive solution.