LVR goes up to save the banks

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Reserve Bank puts banks on notice

Property investors buying homes in the Auckland council region have been put on notice by the Reserve Bank that from October first they will need a 30 per cent deposit instead of 20 per cent – if borrowing money from a local bank.

Reserve Bank Governor Graeme Wheeler hopes the change will reduce Auckland house price inflation by up to 4 per cent a year and reduce Auckland sales by up to 10 per cent. Why he would want to reduce sales I don’t know.

But given property investors have advanced warning of the change, they have time to spend up large before the higher deposit rates kick in – which I think risks property prices spiking. The market in Auckland could get even hotter in a land on unintended consequences.

Wheeler really wanted to cool the city’s property prices at a stroke he would have introduced the 30 per cent deposit rule right away — and perhaps made the LVR 50 per cent to show he meant business. Because the increase from 20 to 30 per cent simply won’t bother too many property investors.

People are already saying the high deposit rule won’t stop people who arrive with enough cash to buy what they like.
It’s likely the real reason for the 30 per cent rule, and a request that banks hold more capital against these loans, is to protect the banks from themselves when the housing correction comes.

Their risk will have been reduced to 70 per cent of a property’s value, giving them plenty of headroom to avoid negative equity, something that can happen when real estate prices drop and the loans tied to them are more than the value of the home.
Wheeler doesn’t want to risk seeing banks on their knees if another GFC is around the corner.

Before the LVR announcement it looked like Wheeler would lower interest rates on June 11. A second rate cut was also being predicted by bank economists for July 23.

But will the higher LVR announcement change this? Perhaps he’ll lower rates in October, to tie in with the introduction of the higher LVR rule.

BNZ’s chief economist Cameron Bagrie says: “Core inflation has now been below the 2 per cent target for 21 successive quarters. That’s enough in itself to justify OCR cuts,” he says.

However, all this speculation does put those about about to fix their mortgage in a spot. Should you sign up for a new fixed term now, or hedge your bets to see if a better deal is around the corner? The good news is there is little sign that floating mortgage rates will go up this year.

But will rates go down in June or October – or at all?

Property Sales Figures

Data from the Real Estate Institute shows that 7234 properties were sold in April, with a combined value of $4.238 billion  (March’s figure was $5.381 billion).

The institute says the national median house price is $455,000, which is $20,000 less than in March. Auckland’s median is currently $720,000 — up 18 per cent on a year ago.

There were 1538 auctions during April, 76 per cent of which were in Auckland.

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