Investor demand expected to diminish as LVRs kick in

The Reserve Bank’s crack down on investors kicking in next month is expected to dampen demand for properties and flatten out roaring house price growth.

Friday, March 5th 2021, 2:08PM

Reintroduced loan-to-value (LVR) restrictions will require investors to stump up a 40% deposit to buy existing properties under the hard line taken by the Government to reduce speculator activity and improve affordability for first home buyers.

CoreLogic research head Nick Goodall says the LVRs will definitely have an effect. “In 2016 when they were originally introduced investor activity and house price growth slowed down.”

He expects the LVRs this time around to knock investor activity back by about 4-5%. “This is going to be the thing to watch.”

If investors are still piling into the market after the LVRs kick in next month, Goodall expects the Reserve Bank to take further action. “It has other macro-prudential tools in its box and could introduce debt-to-income limits for investors later in the year.

“The other factor to watch is the prospect of higher interest rates. In its Monetary Policy Statement released last week, the bank hinted that higher interest rates are coming, possibly as early as September 2022. This will have a further dampening effect for mortgaged investors.”

Investors easing off

Economist Tony Alexander says the sheer speed of price rises over the final four months of 2020 is likely to have accelerated the normal economic process of demand easing as prices rise.

His latest survey of real estate agents shows an easing off of investors in the market. Only a net 31% of agents last month reported seeing more investors in the market, down from 45% in December and 59% in November. This is the lowest number since August’s net 30%.

Alexander says it is partly likely to be because of the extra tightening of minimum deposit requirements for investors by one bank and reduced hopes of finding a bargain.
In June when agents were first asked to indicate why investors were in the market, a gross 60% said investors were hopeful of finding a bargain. That proportion has been falling and last month only a gross 18% of agents reported those “bargain” hopes remained.

A net 2% of agents report fewer investors wanting to sell their properties. Alexander says this is the smallest result on record for this measure and it will be interesting to see if it changes much in the next few months.

“If it does then it will probably be able to be interpreted as a sign some investors are looking to take profits on their purchases – whether recent or of many years ago. There is also potential for this measure to eventually give a strong signal of investor capitulation in their price expectations.”

Replenishing stock
Goodall says the LVRs should be enough to slow house price growth. But an issue affecting the market since the last boom in 2016 has been the lack of listings.

“Since the boom five years ago, the sales volume has not really been replenished.” In the last three months of last year 10,000 houses were sold and the market is scrambling again for listings and prices are being pushed up.

“Consistent growth in listings, alongside a slowdown in sales will be required before there’s any genuine possibility of value falls.”

Adding to the lack of stock has been the under-building of houses across New Zealand for decades, says Goodall. “More than 15,000 fewer homes than required were built across the country between 2015-2020.”

Although building consents are reaching record levels and certificates of compliance show a 97-98% completion rate of buildings consented, for every two consents issued one existing house is knocked down. “The housing stock is not really growing,” says Goodall.

He says putting a figure on how many houses are required now is an almost pointless challenge as so many variables about demographics constantly change.

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