Could 50% deposit be on the cards? LVR
Tony Alexander: Could 50% deposits be on the cards if prices keep rising?
What can we expect to see happen as a result of ASB now following ANZ and BNZ in requiring investors have at least a 40% deposit when purchasing a property, followed now by the Reserve Bank requiring all banks that rule to new borrowers immediately also? First, some history.
LVRs – Loan to Value Ratios – were introduced by the Reserve Bank in 2013, set at a 20% minimum deposit for almost all borrowers. There are always some exemptions, but for the sake of simplicity let’s ignore them. The rules had only a minor impact, and markets regained their strength 3-4 months after people had had time to look around to see that others, like them, were not really concerned.
The next move was imposition of a minimum 30% deposit in Auckland from late-2015. The Auckland market paused for a few months but then took off again. The more lasting impact was the encouragement of investors to flock to the regions, and the 30% move ensured those parts of the country which had not already commenced their lagged response to Auckland’s earlier rise got cracking.
The next change was imposition of a 40% minimum deposit for investors everywhere around the country in 2016. The official implementation date was October, but the Reserve Bank made it clear to banks that if they wanted to retain their licences, they should start applying the rule right away from July.
They did and the impact was immediate. Auckland house prices fell in eight of the 12 following months and come July 2017 were down 1% from a year earlier. Outside of Auckland the pace of house price inflation halved. Will the same things happen this time around? No.
First, back in 2016 Auckland house prices had been rising strongly for over four years. This time they have only been rising firmly since the last quarter of 2019. The market is not overdue for ending the upward leg of its cycle as it was back then.
Second, back then the regions were still catching up after Auckland’s earlier surge from 2012. The more usual pattern is the country’s markets moving much closer together. This time the regions have been on a tear for five years and they are due to pause.
Therefore, whatever happens, if there is an Auckland bias again it will be toward over-performance, not under-performance.
Third, back in 2016 average 1–2-year fixed mortgage rates were near 4.5% compared with 2.5% or so now. Plus, and this is a big new factor driving investors, back then the average six-month term deposit rate was near 3.5%. Now it is 0.8% and savers in banks are seeing their wealth decline after tax and inflation.
Fourth, analysis of results from my monthly Spending Plans Survey suggests that the age group of people most newly motivated to buy an investment property recently will be the group least affected by a 40% deposit requirement – those aged 30-50 years old.
The pace of house price inflation is likely to slow but will probably still be above the 6.8% average price gain seen since 1992 come the end of this year. This is not just because of the factors just mentioned, but the balance of the many others in play such as:
- The expected boost to our economy to come when foreign tourists return in 2022;
- The expected boost from Kiwis returning when the borders reopen, plus more migrants coming in taking up work visas as businesses scramble to find staff; and
- Rising job security and eventually accelerating wages growth.
But here is a key issue investors need to pay attention to. Banks have increased their deposit requirements voluntarily for two reasons. One is genuine concern about bubble elements they are seeing. The other is the key issue businesses are once again facing – lack of staff.
Banks have been overwhelmed with loan requests since June and the surge in investor interest from around August has produced standards of service to clients including mortgage brokers which they are not happy with. So, they have taken a measure to ration demand.
The risk is that demand will not be restricted by enough. If that happens, and the housing market continues to power ahead, they will take minimum deposits to 50%, doing the work our sleepy central bank should already have been undertaking.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz