Lower deposits for apartments?

There’s chatter that some banks may change their lending criteria for apartments by lowering the required deposit. If the change goes ahead it will be welcomed by some of those who have been unable to find a house they can afford.

At the moment, anyone wanting a mortgage on an apartment needs a minimum 20 per cent deposit, but in an apparent bid to widen the mortgage market (and lend more), some banks may cut it to 15 per cent.

If the idea is adopted, a $500,000 apartment will require a down-payment of $75,000 instead of $100,000. Although the size of the apartment may play a factor in the amount needed.

Buyers will have to consider things such as body corporate fees, leases, and parking.

However, some property commentators claim a lower deposit will create an apartment price bubble (even though bubbles are hard to spot until they pop).

But, yes, if something becomes easier to buy, prices could rise — but then dozens of apartment developments are under way across Auckland. There is choice.

Borrow less

In February I suggested that one way to cool Auckland’s housing market – and put the breaks on the rapid rate of property price rises – was to put a restriction on how much money people can borrow.

Years ago in the UK my building society would lend me only three times my annual salary. The policy, known as “loan-to-income ratio”, prevented home buyers from borrowing more than they could afford to repay and kept house prices in check (until it was abandoned).

Right now in New Zealand there are no such restrictions, and cynics might wonder if banks have taken this light-handed approach to lending knowing they’ll get their money back.

Auckland median property prices have risen by almost 20 per cent since May last year, so lending on Auckland property is low risk. In my opinion it is the banks’ apparent casual lending that has played a large part in the city’s rising cost of property. So, I’m pleased to hear our Reserve Bank is looking at this idea.

Such a system was put in place by the Reserve Bank in the UK last year, people there can only borrow 4.5 times their annual income.

If the same ratio was applied here it would lead to some interesting times as someone earning the current median wage of $44,876 (Stats NZ) would be able to borrow only $201,942, or $403,884 for a couple.

Such a ratio would bring Auckland’s house prices down but risks trapping people in homes they can’t afford to sell. Again, our Reserve Bank has been asleep at the wheel.