Decision To Remove Loan-to-Value Ratio Restrictions Puts Profit Ahead Of Family Wellbeing In Homes
Reserve Bank decision to remove Loan-to-Value Ratio restrictions recreates market conditions that put investment for profit ahead of family wellbeing in homes
“The Reserve Bank (RBNZ) decision to remove LVR restrictions deactivates the most successful intervention in our housing system in recent memory. Changes to the LVR restrictions in 2016 took heat of the market and provided hope to first home buyers literally overnight” says Brennan Rigby, project lead for The Shift Aotearoa.
“The success of the 2016 LVR iteration was not about stopping investment or stalling investors. It was about stabilising the market, testing and ensuring our real estate bubble hadn’t expanded too far – a huge risk to our economy, and trying to give families a shot at owning a house one day.”
“Without LVR restrictions we will return to the same 2016 regulatory environment. Remember that? Prices sky-rocketing. Investors dominating auctions with more capacity to stretch their finance and higher appetite for risk than the family bidding beside them.”
Mr Rigby identifies two major differences between now and 2016, heightening risks to our housing system. Interest rates are much lower (which would been unbelievable in 2016) and our economy faces a sudden COVID-19 slow-down. This will cause a dip in market prices, meaning stressed vendors may be forced to sell into that ‘low & slow’ market.
“The Reserve Bank has decided to free up more lending recreating excellent conditions for investment for profit. This additional lending cannot be targeted by the Reserve Bank, so it may be taken up by those with reserves and appetite for risk: investors. This comes with instability and inequality, taking us back to 2016. COVID-19 and the economic slow-down are at the heart of the Reserve Bank reasoning, but there is no indication of how these competing outcomes have been balanced.
“A lot can be done to create and sustain a stable housing system. We should start by making the wellbeing of families in homes our key concern, and then view decisions through that lens. There was no reference to family wellbeing in the Reserve Bank consultation.”
Mr Rigby says both the proposal and the decision processes were problematic.
“The consultation period was very short and the material outlining the implications of the proposal was insufficient, given the significance of this move. A basic ‘keep it/alter it/remove it’ options assessment on the LVR restrictions suggests few arguments for removal but good reasons for alterations in response to COVID-19.
“There is a time and place for fast decisions. The process suggests the audience was expected to be ‘industry only’, but the implications of the change go way beyond the banking industry. I’m disappointed an instrument that RBNZ’s own evaluation declared a success – the LVR restrictions - has been so easily extinguished, with so little information.”
Background about The Shift Aotearoa
The Shift Aotearoa is a 5 year project focused on the housing system and reducing poverty.
The project will bring together the human right to housing, the capacity of housing to impact poverty, and the need to address the system of housing. It relates closely with The Shift, a global movement around the right to housing, the development of rights based housing strategies, and identifying and mitigating the risk of financialisation.
The Shift Aotearoa creates a case for change, for rights, for the social function of housing, for tenants, and for a strong system with strong market and social outcomes.
The Shift Aotearoa is philanthropically funded in a sustainable way.
Due to the time frame The Shift Aotearoa was unable to submit on this proposal by the closing date. The following email in lieu of a submission was submitted on 30 April, with the decision released later that day. A full submission was also made on 30 April.
Email to Reserve Bank 30 April, 2020.
“There is a fundamental rationale for considering the LVR settings at this time, in order to ensure families impacted by COVID-19 are able to access support or relief through their banks, against existing mortgage lending. The Reserve Bank suggests there is are further reasons including utilising the counter-cyclical nature of the LVR, and avoiding uncertainty for banks about how that additional lending should be treated against LVR limitations.
The success of the 2016 iteration of the LVR settings, which had an immediate and needed dampening impact on the market, have been widely celebrated. This change had significant positive flow on impacts for the right to housing and the social function of housing, as the average price plateaued, the rental market stabilised, and stability and security for lower-income families increased.
The LVR is currently the one and only significant regulatory setting having a positive intended impact on the housing system and the housing market. It reduces investment for profit, and as such it provides some protection for social wellbeing in housing (although more tools are needed).
The removal of the LVR restrictions creates a new risk to the right to housing.
Removing the LVR at this time would create one more incentive to investment for profit in our housing system. Existing incentives include the very low interest rate, stressed vendors, undervalued assets, our open economy, and out investment-friendly tax environment. Hence, the LVR stands alone as a system intervention protecting the social integrity of our housing system [this was demonstrated by the impact of the 2016 change].
There must be a case for altering the LVR settings rather than removing it. Changing the setting must open up further lending to support families, even though it is deeply troubling that banks are operating so close to existing limitations they are apparently unable to respond to a crisis [expanded on in our full submission*].