The Reserve Bank Want Bigger Deposits

This is bad news for first home buyers!

In a time when it is hard enough to save a deposit to buy your first home, the Reserve Bank is wanting to see bigger deposits as a way to protect the property market from a drop in house prices.

The Reserve Bank Want Bigger Deposits

The Reserve Bank plans to tighten LVR restrictions for owner-occupiers as it clamps down on low deposit home loans.

Reserve Bank deputy governor Geoff Bascand said the proposal was prompted by soaring house prices.

Bascand told Good Returns that “our analysis indicates that house prices are above their sustainable level, and the risks of a housing market correction are continuing to rise. The proposed tightening of LVR restrictions will over time help reduce the number of highly leveraged borrowers and help to build resilience in the financial system.”

In a consultation paper, the Reserve Bank say that any new rules could come into effect as early as the 1st October.

They noted that there are real concerns that the new rules could make it harder for first home buyers but also said the rules should also flatten house prices. They openly admit that first home buyers are the target as they are the people buying houses with lower deposits (of course!) and therefore most at risk if house prices do fall. It’s why they want bigger deposits.

The Reserve Bank say “we acknowledge that tightening LVR restrictions on owner-occupiers is likely to reduce the number of first home buyers with low deposits who are able to enter the housing market in the short term. However, reducing house price inflation will improve affordability for first-home buyers.

We are not as confident that interventions will make much of a difference to house prices as over the years they have said this before, and yet little has changed. While we continue to have a housing shortage then house prices are unlikely to drop, and instead they will be purchased by investors who will see rents soaring rather than first home buyers trying to get a step onto the property ladder.

It pointed out that exemptions to LVR restrictions, such as the Kāinga Ora First Home Loan and loans for new builds, would “continue to support access for first-home buyers”. 

Reserve Bank Consultation

The Reserve Bank have issued a consultation paper, but most people are saying that they have already decided what they are doing.

The expectation is they will push through with the changes anyway, as they are not leaving much time for any ‘so call’ consultation, but maybe if enough people voice concerns then they may listen.

A consultation document on the LVR changes can be found here.

They are currently consulting and asking for feedback.

Address submissions and enquiries via email to: [email protected] and use the subject line: “LVR Consultation September 2021”

Address The Real Housing Problem

The real problem with house prices and affordability is the market forces of supply and demand, and it always has been. Introducing the requirement for bigger deposits doesn’t do anything to fix this problem.

In New Zealand we have a shortage of homes for people to live in.

We have a shortage of rental properties and that is seeing rents sky rocket. The Government has made changes to deter property investors and that has seen rents be forced to even higher levels and less properties for renters as well as a surge in emergency housing. With the massive failure of KiwiBuild the Government has also been in the market buying houses that were built for first home buyers, meaning less houses available and pushing house prices up.

We have a shortage of houses suitable for first home buyers. The houses are too expensive and this comes down to the land costs and the build costs, plus of course the lack of supply mentioned that forces house prices up. The Government need to make the development of land more affordable so that the section costs are lower and they have the ability to do this even if they make it specific for first home buyers as in the Affordable Homes Programme that already exists.

Build costs are too expensive but prices could be reduced if there was the ability to build houses in factories instead of onsite. A major issue for this is the ability to get finance for these types of prefabricated houses as the banks provide finance with a mortgage attached to the land, not to a house in a factory. There needs to be some though around how the banks can do this and it may require the Government to step up with some form of guarantee. It is something that needs to be looked at as it works in many places around the world and could work here too.

Consenting builds is too expensive. You see a building company with a standard house design and they need to get a consent for each of those houses that they build. Why can’t they get one approval for the house and then they could build multiple of the same design without the need for multiple consents. This would save money and time.

Apartments should be the ideal first home. You will generally find that apartments are cheaper than townhouses or houses as you are not paying for the larger amount of land. One of the problems with apartments has been that the banks require a bigger deposit and therefore it has been too hard for first home buyers to buy an apartment. There has also been the large number of apartments that have had weathertightness issues which have put people off. There needs to be some thought on how to make apartments easier to buy for first home buyers and that could come in the form of a guarantee provided by the Government too.

There are plenty of ways that a Government (any Government) could step up to help address the housing problem, and leaving it to the Reserve Bank to tinker with the lending rules doesn’t really help. There are ways that the Government could help with guarantees and assurances which should realistically have very little cost if they are designed correctly.

Unless some of the fundamental supply issues are dealt with then I fear that house prices will continue to increase while first home buyers will continue to struggle to get onto the property ladder, especially if bigger deposits are introduced.