The Coronavirus has pushed us into unprecedented times. Policymakers are rewriting the rulebook and experimenting with unconventional policies. It is not unimaginable that structural changes could flow into the property market, with new structures and rules implemented.

Any rule changes would have a significant impact on the property market.

In fact, when Tony Alexander, an independent economist, recently joined the Property Academy Podcast, he emphasized that long term ‘structural changes’ caused New Zealand’s significant house price over the last 30 years:

  • Rapidly decreasing interest rates making it cheaper for borrowers to take on more lending, bidding up house prices
  • High net migration, rapidly increasing housing demand at a pace supply could not keep up with
  • A massive lack of new supply coming onto the market

These significant structural changes make sense in hindsight, but can be hard to forecast.

That’s why in this article, we’re going to imagine three different ‘structural change’ scenarios to investigate their impact on the property market.

Imagining potential scenarios – whether they eventuate or not – helps us to understand what could potentially happen in the future. And as you’ll see through these scenarios, small changes compound to have significant impacts.

Scenario #1

Scenario #1 – The Maximum Mortgage Term Increases From 30 to 35 or 40

The Scenario

In an attempt to help first home buyers get into the property market, the government, in partnership with the Reserve Bank, encourage banks to extend the maximum loan terms given to young New Zealanders.

Instead of paying off their mortgage over 30 years, the government considers proposals to lengthen this time to 35 or 40 years.

Increasing mortgage terms decreases each month’s required payment—this allows first home buyers to borrow more. First home buyers promptly take advantage of this, increasing their borrowings to buy more expensive and nicer properties. This bids up house prices, causing a long term structural increase.

First home buyers are happy because they can compete in the housing market, which has the added benefit of increasing the wealth of anyone who already owns property.

The Impact

Increasing the loan term from 30 to 35 years would increase the amount a first home buyer could borrow by 4.14%. If a first home buyer could afford to borrow $500,000 on a 30-year term, they could now afford to borrow $520,697.

Similarly, increasing the loan term from 30 to 40 years would increase borrowing ability by 7.06%. The first home buyer who can afford a $500,000 mortgage now could afford to borrow $535,298 over a 40-year term.

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As first home buyers bid up the prices of entry-level homes, a secondary effect also occurs.

The previous owners of entry-level homes, who are now in a position to trade-up to their next property, can compete more aggressively.

They bid up house prices in their new tier, which allows the seller of that property to bid up prices as they go house hunting. In effect, this scenario creates trickle-up economics.

Scenario #2

#2 The Test Interest Rate Falls From 7% to 5%

The Scenario

As interest rates continue to fall, the rate property buyers actually pay, and the ‘test’ interest rate get more and more out of whack.

Although interest rates nudge below 3%, mortgage applications are still tested at 7% by the banks (which happens right now).

That means homebuyers who are on the edge of affordability (usually first home buyers) are sometimes unable to take advantage of low interest rates to get into the market.

The government, seizing the opportunity, aligns with the Reserve Bank and through the government-owned Kiwibank decreases the mortgage test rate to 5%.

This increases the number of first home buyers Kiwibank attracts, expanding the company’s profits.

The four main Australian banks, feeling the commercial pressure, all follow suit, and begin testing mortgage applications at 5%.

In this scenario, property buyers take on more lending, which sparks additional heat in the housing market. House prices leap forward.

The Impact

If a prospective home buyer can currently afford a mortgage of $500,000 using the 7% test rate, they could now afford to borrow $619,667 using the 5% test rate. That would allow all property buyers to take on 23.93% more lending.

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The effects compound if banks adopt both longer loan terms and lower test interest rates.

A 35-year loan term combined with a 5% test interest rate allows property buyers to borrow 31.82% more than they can now. Using a 40-year loan term in the same circumstances will enable them to take on 37.97% more lending than at present.

In the latter case, the home buyer who can borrow $500,000 now could then borrow $689,865.

Scenario #3

#3 The Deposit Required For Investors Through the LVR Restrictions Are Eased From 30% to 25%

The Scenario

In our final scenario, the Reserve Bank, realizing it needs to bring confidence to the New Zealand economy post the Covid-19 shutdown, relaxes the Loan to Value Ratio Restrictions.

The Reserve Bank Governor releases new rules that allow investors to purchase existing properties with a 25% deposit, down from 30% where it is now.

The new policy has a double impact. Not only can investors borrow more with the same amount of deposit, but the change also gives investors’ larger deposits.

How? Investors can now borrow more against their existing investment properties to fund the deposit for their next purchase.

This change of policy lowers the barriers to entry to invest, which promptly encourages more aggressive behaviour in the property market, leading to the bidding up of house prices in the process.

The Impact

An investor with a property worth $550,000, which has a $300,000 mortgage secured against it, can borrow $85,000 against the property under the existing LVR rules.

As the rules are relaxed, she can now borrow $112,500 against this property to fund the deposit for her next investment – a 32.35% increase.

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She now uses this larger deposit to borrow more money, and under the 75% LVR, she can purchase a property worth $450,0000.

Under the previous rules, she could only purchase up to $283,333.

The new rules allow the investor to borrow $166,667 more – a 58.8% increase. That allows more investors to enter the market, bidding up house prices.


Which of these are most likely to happen?

These scenarios are speculative for sure. And the last is much more likely to occur than the first. The media and property commentators have mooted relaxation of the LVR rules over the past year.

Whether these scenarios eventuate or not, they clarify that small structural changes to bank policies can significantly impact how regular people behave in the housing market.

We live in a time where policymakers are rewriting the rulebook and experimenting with unconventional policies.

It’s not incomprehensible that mortgage terms could lengthen, test rates could decrease or that the LVR restrictions could relax.

Any combination of these policies would add significant stimulus to property buyers, which would heat the market and increase house prices.


Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.