Loan-to-value ratio (LVR) restrictions reduce house price pressures by almost 50%, according to the latest report from the Reserve Bank of New Zealand (RBNZ).
In its discussion paper, RBNZ explained that housing markets are affected by a range factors over and above LVR policy. New Zealand experienced a raft of policy changes and macroeconomic shocks during the periods in which LVR policy changes were implemented, which also had a marked effect.
“This paper contributes to the international policy debate on the effect of macro-prudential policy on housing-market dynamics,” RBNZ noted.
RBNZ said it used the exemption for new builds from the LVR restrictions as a natural experiment to identify and detail the effect of LVR policy.
The paper suggests that over the one year window around the new home exemption, the first LVR policy (referred to as “LVR 1”) had a 3% moderating effect on house prices – this moderating effect is broadly similar across both Auckland and the rest of New Zealand.
It shows that LVR 2 (which tightened restrictions on Auckland properties and loosened restrictions elsewhere) did not significantly stop Auckland house prices from rising. By contrast, house prices in the rest of New Zealand (RONZ) increased by 3% due to the relative loosening of the LVR restrictions.
Moreover, when RBNZ further tightened the LVR restrictions on property investors nationwide in LVR 3, the moderating effect was clearly seen in Auckland with 2.7% reduction in house prices. The paper suggests that the LVR 3 effect is both statistically and economically significant, as during the same period the average house price increased by 5.8%.
However, RBNZ said, the effect of LVR policy is highly non-linear. “When it becomes binding, LVR policy can be very effective in curbing housing prices,” it stated.