Podcast: LVR Restrictions to be Eased ... Market to Get Hot | Ep. 228

Posted by Ed McKnight on 29/04/20
LVR Restrictions to be Eased Market to Get Hot 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss the Reserve Bank's recent announcement that it will scrap the Loan to Value Restrictions for a period of 12 months.

This will have a massive stimulatory effect on the property market as: investors will have more ability to borrow against their existing portfolios to buy more property. They'll also be able to purchase more property using that lending.

We also discuss our property investor webinar, which is coming up this Thursday at 7 pm. We're going to teach you how to grow your property portfolio from 2 to 5 properties.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the property and getting me podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about the LVR restrictions, the loan to value ratio restrictions.

Now, there was a very exciting announcement that came out early last week that said that the reserve bank is doing consultation currently about removing the loan to value ratio restrictions. Now that consultation period is about seven days, and look, it's definitely going to go through because the reserve bank's made up its mind, and that consultation is only with the commercial banks anyway, so the letters have been sent out, and what it's suggesting is that all of the loan to ratio restrictions will be removed for a period of about a year.

Now let's just quickly recap what these loan to value restrictions are and what they mean. And essentially, they put a limit on the bank’s ability to lend high LVR loans. That means high low deposit loans is another way of saying it. So where there's a lot of lending and less equity. Now what that actually means in practice is that most investors, 95% of investor need to have a 30% deposit if purchasing an existing property and there is no LVR restriction on new property, but generally speaking, it's a 20% deposit needed for a brand new property at the moment.

So 30% for existing, 20% for new. Now, the other big important factor this has is it also would mean that if the loan to value restrictions are lifted, it puts a limit on how much you can lend against your own property. So at the moment you can borrow up to 70% of the value of an existing rental property you've got in your portfolio.

So Andrew, what do you think about this and what impact is it going to have for investors.

Andrew Nicol: It's a really interesting, because this is going to give people so much more purchasing power as their deposit increases, and so I was just playing around with some numbers and it might not seem like a major increase.

So say the banks went from 80% and they allowed you to go to 90% on your own house. So what that means is if you're buying your own owner occupied property, you can do it with a 10% deposit rather than 20% but for investors who are looking at leveraging against that dead equity in their house and taking out their usable equity, then let's say someone with a 500 K house, who's got 200 K debt at the moment, they've got 200 K usable equity, and again to work that you've got 500 times 80% is 400,000 that's the bank value minus existing debt 200 gives you 200 usable equity.

Now, that would go up, the bank value would go up to 450 being 90% of 500 and then minus the 200 again, that increases it to 250. Okay, that's an extra 50 grand worth of deposit. But now if you're buying, if you converting that into purchasing power under the current rules of 70% lending for an investment property and existing rental property, that gives you purchasing power of 833,000. Now if we apply that at 80% that increases to 1.25 million, which is massive.

So all of a sudden someone could buy maybe two or three rental properties rather than just the one. So that gives people so much more purchasing power against their usable equity in their own house. And then if they've got an existing portfolio where they've been limited to 70% borrowing on the investment property, that increases their usable equity in that property, and again, allows them to repeat that process much faster. So it's pretty exciting news.

Ed McKnight: Exactly. And the big thing there is, you know, there really are kind of two bites of the cherry, the ability to borrow more. So the fact that first of all, your deposit goes further. So if you've got 100 K deposit, it now automatically buys more property is really exciting, especially if you're investing in an existing properties. The second part is that you've got a bigger deposit.

So not only does it go further, but you've got more of a deposit because you can borrow more against your existing portfolio. Now the big thing to remember as well is that, with the loan to value ratio restrictions being removed it leaves a lot of these decisions up to the bank to decide how much they're actually going to lend. So that means that conceivably you could purchase existing investment properties with only a 10% deposit because it wouldn't go against the loan to value ratio restrictions.

Now, are we actually going to see that in practice? Well, it's going to come up to bank lending policy, and that is the big unknown in this. My feeling is that we are going to see some conservatism within the banks in terms of what they're going to lend, because these loan to value ratio restrictions, the easing of them is only for a limited period. So because the reserve banks only come out and said, well, we're going to ease them for 12 months, I think that the banks are going to be somewhat conservative knowing that they're going to have to convert their book back potentially.

Now, whether or not that actually happens and actually a 12 month time limit has put on the easing of these restrictions, and then actually that limit will just be removed in 12 months. That's conceivable. But I think the banks are going to prepare for the situation where they've got to move their book back to being more conservative under the current LVR restrictions. So I wouldn't be surprised if there still was some conservatism from the banks.

But Andrew, you're actually a mortgage broker. You've got a background in the banks. How do you think the banks are going to behave under this kind of scenario?

Andrew Nicol: So, there'll be a lot of pressure from the government to actually be a bit softer on lending applications and get some money out there. That's what the government wants to happen. And whether or not this is a year or longer will depend on whether or not we have an election this year or next year in my prediction, because the government will want there to be strength in the market when people are voting, that's just a fact because they want voters to feel positive about the current government and the economic climate.

One thing that I would say, just because potentially this might be a 12 month window, maybe less maybe more, when the announcement comes out, I would go to a broker and get set up, get yourself set up with a deposit facility. Get a revolving credit for your entire usable equity, and have it sitting there.

Even if you're not going to invest this year, make sure you've got the ability to have that revolving credit in place for when you do want it, because that gives you complete freedom. If you've got a revolving credit, it's much less likely that the banks can take it away rather than going to apply later on and have them change the rules again.

So if you've got that facility in place, then you'll probably be in a stronger position later on down the track even if they do change those rules back, because once loans in place, they tend not to review those quite the same.

Ed McKnight: And I think the other thing, just to remember as well, is what impact would this have on the property market. Now remember, I wrote an article a couple of weeks ago, just as we're going into the lockdown talking about, well, what would happen if there was an easing of the LVR restrictions? So it's good that we've got one prediction at least, right.

I was writing about what would happen if the LVR for existing properties was eased from 30% down to 25%. So we're now talking about a situation where it's eased even further than that. And I was walking through a situation where an investor who could only previously purchase an existing property worth about 280,000 could all of a sudden purchase worth 450,000 and could access about 58% more lending in order to purchase a property because of that 5% difference.

Now, if we re ran those numbers would say that they would actually be able to purchase much more than that. So small changes in the loan to value ratio restrictions have massive impacts to what people can borrow. Now remember the big question we had when we released that article as well, we had some list of saying, well why does that change anything?

Just because people have more access to lending, that doesn't change the fundamental value of a property. And our answer to that is properties really don't have a fundamental value because they've got, the majority of the market is made up of private owner occupiers who are buying on emotion as opposed to what the numbers actually say. So if you go out and give everybody more lending, then we've going to have a more competitive market because more investors can get into the market. More owner occupiers are going to be able to get into the market as well.

And that's going to really add some heat in there. And we'd expect to see some price inflation because of this. Anything else to add before we wrap up?

Andrew Nicol: Just one last thing. I would expect that the government will also push the borrowing ability out on new property because they still want to add new properties into the market. We've got a housing crisis, we need more properties.

And so they may very well increase the borrowing ability on a brand new property to say 90% or 95% to an owner occupier which it was in the past. So, you can expect to see some change in that space as well, which is really exciting because you might be able to buy an investment property with as little as $50,000 deposit going forward.

Ed McKnight: Fantastic. Well, let's wrap it up there, but just before I do, I also want to read out a review that we've had on iTunes about the podcasts we used to read these out, and I've just remembered that it's probably a good time to read some more out.

And actually there are some great ones. I would have read you this, Andrew. This person's, it's a five star review with the title really entertaining and informative, and it says, I always love the intro and outro. Andrew, one of the hosts seems like he calls in and when he supposed to say his names, there's a slight delay. Ed carries on. Then Andrew comes in, always a laugh. It's like a daily dose of...

Andrew Nicol: That's normally because I'm sipping my wine.

Ed McKnight: Then they've gone on to say it's like a daily dose of multivitamins. Will be a listener for life. I usually can't be bothered doing reviews, but they deserve it. And that's from Cole am cool, I think is how you say that username.

Hey, we really appreciate that. I got a great laugh when I read that, and thank you for saying that you'll be a listener for life, we really do appreciate it. Now please do rate, review and subscribe. If you leave a review on iTunes, we will read it out on the show so you can get, have a little laugh as we read yours out, and of course, if you want to learn more about property.

We are holding a webinar this Tuesday at 7:00 PM and we're talking about how to grow your property portfolio from two to five properties. And the one thing I'll just say while we're on the topic is, one of the best things about these webinars is that all the people who listen to the podcast get on and we start chatting back and forth, and it's really good to have that kind of interaction with anybody who's listening to the show, because usually we're talking to our microphones and we don't get to talk to you guys, so we really do appreciate it when you come on and we get to actually have a chat.

Now I'm going to drop a link to that in the show notes. So tap or swipe over that cover art. It'll take you right there, or you can also just here to our website, Opespartners.co.nz and sign up for that.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.