Loan-to-value restrictions could inflate
Christchurch property market

Harcourts Grenadier auctioneer Phil McGoldrick during an auction in Christchurch on Friday.

Hopes lifting minimum mortgage deposits will take the heat out of the property market may cause the opposite effect in Christchurch, experts say.

Loan-to-value (LVR) restrictions were removed last year to ensure there was no undue impact on borrowers or lenders during the Covid-19 pandemic, but the Reserve Bank is bringing back LVRs because it is concerned buyers are taking too many risks.

Banks have already implemented the restrictions, limiting 20 per cent of new lending to owner-occupiers with deposits of less than 20 per cent. Investors now needed 40 per cent deposits or equity – though there were exemptions for new builds.

Economist Tony Alexander said the restrictions would take some investors out of the market, which would free up property for first home buyers. However, LVRs would be a negative overall because many potential buyers would no longer be able to raise the finance they needed.

Auckland investors may not have the 40 per cent deposit required for properties that were not new builds, but their money would go much further in Christchurch, he said.

January figures show mortgaged investors now make up 29 per cent of Christchurch’s entire housing market – the highest proportion since the first half of 2016.

Joseph Johnson/Stuff
tCoreLogic senior research analyst Kelvin Davidson says Christchurch is more affordable than other major cities, making it an attractive spot for property buyers.

CoreLogic senior research analyst Kelvin Davidson said LVRs could make Christchurch an attractive proposition for big city investors.

“Christchurch is just looking so much more affordable than other areas, both for investors and owner occupiers. In other words it’s easier to raise the deposit and make that purchase.”

Higher rental yields in Christchurch compared to Auckland and Wellington were also an important factor, he said.

Christchurch’s average weekly rent was just over $400 in December, compared with $600 in Auckland and $620 in Wellington. REINZ statistics show Christchurch had an average rental yield of 4.1 per cent, compared to 3 per cent in Auckland and 3.6 per cent in Wellington.

Reserve Bank Governor Adrian Orr says targeted government policy could do much more for the property market than monetary policy can. (First published November 2020)

Davidson suspected some investors would focus on new properties, which would be positive for Christchurch as it would lead a higher standard of rental properties.

Alexander said LVRs would encourage investors to purchase new rather than existing properties, but that would place further pressure on section prices, which were already rising.

Williams Corp managing director Matthew Horncastle said he believed LVRs would help create the 50,000 new builds needed annually across New Zealand to keep up with population growth – instead of the 30,000 being built now.

Harcourts Grenadier auctioneer Phil McGoldrick in action in Christchurch on Friday.

Canterbury’s challenge was the lack of available land approved for new builds, he said.

“What we need to do as a country is a mass rezoning of land for 10 to 20 years.”

Horncastle said interest from North Island buyers had increased by 100 per cent since February last year and he had no stock on his books for the first time in his career.

He believed investors wanted to move their money into inflation-proof assets like housing.

Mike Pero Canterbury mortgage adviser Steve Walsh said there was a lot of misinformation regarding LVR levels among second home buyers, with some believed they could not buy without a 20 per cent deposit.

“It is possible to buy as an owner-occupier with as little as 5 per cent.”

Rather, LVRs meant banks were limited to doing 20 per cent of their total business with that sector of the market, he said.

The heated property market meant some buyers were turning to private leaflet drops and appealing directly to potential vendors to try to find a way into the market.

Kate McDougall is looking to move to Cashmere from Lyttelton to be in a desired school zone.

She began looking in October, but became disillusioned with the process after a property she tried bidding on at auction went for $200,000 above its rating valuation.

Many families are looking to move into desired school zones but the hot property market is making that difficult.

She did not think LVRs would dampen the Christchurch market.

A close family member was contacted by an Auckland investor within 24 hours of listing their unit. They ended up selling it to a Christchurch investor, she said.

“It’s going to ramp up really quickly here until it’s at the same level [as elsewhere].”

Harcourts Grenadier auctioneer Phil McGoldrick said LVRs were having a significant effect on real estate. Last week he had 22 offers on one property and seven had a personal letter attached, begging the vendor to accept their offer.

“I’ve been in the market 38 years, and it’s the strongest market I’ve seen.”

Reserve Bank deputy governor Geoff Bascand said LVRs were not a way to manage house prices and were reinstated because the bank was concerned about the risk a sharp correction in the housing market posed for financial stability.