A leading economic think-tank says first home buyers are missing out on affordable homes, which are being snapped up by investors following the easing of the Reserve Bank’s restrictions on how much banks can lend to buyers with small deposits.

The New Zealand Institute of Economic Research (NZIER) has modelled what it believes is the number of low-income households displaced by the restrictions. It found that the recent 10 percent easing in loan to value ratios (LVRs) is likely to double investment demand, crowding out low-income, first-home buyers. 

LVRs were imposed by the Reserve Bank in 2013 as a way of limiting the risk from an overheating housing market on the wider banking sector. They were eased in November last year, ostensibly making it easier for first-home buyers and investors to enter the market. 

The restrictions require banks to demand larger deposits from borrowers before offering them a mortgage. They also restrict the number of riskier, low-deposit loans a bank can offer. Currently, banks are only allowed to offer 20 percent of new mortgages to owner-occupier borrowers who have deposits of less than 20 percent of the value of the loan. 

For investors, the requirements are even tighter. Banks can only offer 5 percent of new mortgages to borrowers who have deposits of less than 30 percent. 

This essentially forces most borrowers to have deposits of more than 20 percent, if an owner-occupier, and 30 percent if an investor. 

NZIER’s modelling showed that before the LVRs were eased by 10 percent in January, investors would require household income levels of $120,000 or greater to qualify for a mortgage. The recent easing of LVRs has meant investors are now able to enter the market with a household income of $105,000 or less. 

NZIER believes the investor demand doubling has led to an increase in rental stock, crowding out first-home buyers who are having to compete for low-cost housing stock with ever-greater numbers of investors. 

According to NZIER’s modelling, the crowding out effect is more pronounced than straight housing affordability among households earning roughly $60,000-$100,000. 

Their modelling suggests the increased competition at the lower-end of the price scale will push up the price of low-cost housing, decreasing affordability. 

NZIER Principal Economist Christian Leung said the LVR changes were having widespread unintended consequences. 

“For those who can still take on a mortgage and get into the housing market, it means increased debt levels for them,” she said.

“They would likely have to respond in different ways, including reduced spending,” she said. 

Infometrics economist Gareth Kiernan agreed that easing LVRs for investors to a minimum deposit of 30 percent seemed to be a tipping point. 

“It wasn’t until those investor restrictions pushed up towards 40 percent in 2016 that we really saw it have a significant effect on the market,” he said. 

But Kiernan said current market conditions could have an effect on investor demand. 

“Market conditions now as to what they were three years ago, if you were looking to buy a property in 2015, the way things were going it looked like it was going up [in value] 20 percent a year,” Kiernan said. 

“Now with the speculative element being squeezed out of the market, particularly in Auckland, there’s not that same urgency, the same fear of missing out,” he said. 

He said uncertainty over policies like the potential capital gains tax could further weaken investor demand. 

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