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Effects of LVR not clear cut

Effects of LVR not clear cut

The implementation of the Reserve Bank’s high loan-to-value limit policy over the last two months has resulted in the publication of various statistics and opinion pieces from different sources. Some of these are contradictory and some are misleading.

Many commentators have stated that the LVR restrictions have resulted in property investors being given an unfair advantage. However these comments are misleading as property investors cannot be considered one homogenous group with equal buying power.

“There seems to be a school of thought that property investors have an endless supply of equity and can simply use this equity to buy all the properties they want.” said Andrew King, Executive Officer of the NZ Property Investors’ Federation (NZPIF), which represents the 21 property investors’ associations spread throughout the country. “The LVR restrictions are having an equally negative effect on property investors with low equity as they are having on first home buyers with low equity. Most people don’t realize that 90% of NZ property investors only have one or two properties”.

If a property investor owns a property with a 75% mortgage they are no longer in a position to buy another property. Unless they buy well below true market value, investors need at least 60% equity in a rental before they can use this equity to buy more property. Even if they own the property outright, the maximum number of similar properties they could buy before they run out of equity would be four. This doesn’t even take account of the cash flow requirements in getting a loan.

The stated purpose of the LVR restrictions was to improve financial stability into the housing market, which means making it harder for people to take higher risks when borrowing.

“While the NZPIF believes that people should be free to judge their own levels of risk, the Reserve Bank policy could see lower interest and exchange rates which will have benefits for the wider economy” says King. “As with all regulations there is a price to pay and unfortunately it is first home buyers and property investors with low equity who will be restricted in what they want to do”.

While there have been calls to exempt first home buyers and new building from the LVR restrictions, such exemptions would reduce the beneficial impact of the regulations on interest and exchange rates.


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