Study sheds light on the impact of LVR restrictions

Regulator releases analysis on home-buyer vulnerability and deposit affordability

By Krizzel Canlas

17 Jul 2018

New Zealand is seeing an improvement in the resilience of mortgagors and the overall financial sector to different risks, a new market analysis reveals.

According to a report from the Reserve Bank of New Zealand (RBNZ), new home-occupier mortgagors are less vulnerable to a housing market bust, declines in incomes and to increases in interest rates now, relative to the pre- Loan-to-Value Ratio (LVR) period. The share of households with high debt-to-income (DTI) ratios, high debt-service-ratios (DSR), as well as high LVRs declined considerably after the introduction of LVR restrictions.

The report suggests new borrowers in Auckland appear less resilient to interest rate or income shocks. It also shows that deposit affordability declined, especially in Auckland.

“Although the LVR restrictions are likely to have required some households to save longer for a deposit than otherwise, it is difficult to disentangle this impact from other factors, such as rising house prices,” RBNZ said.

“Commercial banks can fund some high LVR borrowing under the current regulations. In the period since the LVR policy has been in place, commercial banks have disproportionately allocated high LVR lending to first-home buyers.”

“There is also evidence that first-home buyers have substituted to lower value housing and relied on parental guarantees,” it added.

RBNZ used the Household Economic Survey (HES) microdata provided by Statistics New Zealand to assess changes in the vulnerability of new non-investor mortgagors from 2006 to 2016. It covers the first two rounds of the LVR policies implemented by the RBNZ.