House prices soar because of LVR

Are loan-to-value restrictions making any difference to the housing market?

Ahead of Reserve Bank governor Graeme Wheeler’s report today, the real estate industry is divided.

Real Estate Institute chief executive Helen O’Sullivan claims they are.

She also claimed a few weeks ago that young couples with pre-approved loans were madly buying anything available before the loan-to-value restrictions came into force.

But some insurance companies and real estate firms contacted by NBR had not experienced any surge in sales from first home buyers.

How can anyone judge the effect of the LVR restrictions?

Median and average prices continue to test the 2007 housing market peak, after adjusting for inflation.

But there is some evidence LVR tightening is affecting the lower end of the market.

Harcourts says in its latest Market Watch that there has been a drop in the number of buyers at the lower end of the market – first home purchasers.

Therefore it is unsurprising the average price is up, with lower value homes in less demand, Harcourts says.

“The LVR restrictions mean there is less risk in the loans the banks are writing. However, it doesn’t solve the problem the Reserve Bank set out to fix – an overheated property market," the agency says.

And as Harcourts points out - first home purchasers outside of Auckland and Christchurch will be most affected even though they are least affected by housing unaffordability.

Harcourts concludes that for first home buyers the LVR restrictions are merely a delaying tactic.

It may stop them entering the market in the short term but there are options available without a 20% deposit such as the Welcome Home scheme, a home loan/personal loan mix, or parental guarantee.

“As first home buyers become more aware of these options, the LVR restrictions will cease to have the desired effect.”

In summary, LVR restrictions may be hitting first home buyers and possibly protecting some people from expected rising interest rates but they are doing little to resolve soaring values overall.

Average prices – inflation adjusted - are currently 4% below the 2007 peak price so it may only take a couple of months of busy sales to surpass the previous bubble.

But Mr Wheeler will have his own perspectives when he reports tomorrow.

c.hutch@clear.net.nz