The Journey back and the opportunity that exists

LVR and more

Yesterday, we all received notification that the RBNZ has submitted a proposal to remove current LVR restrictions - for a period of 12 months. This is a good thing for so many New Zealanders as we all face the challenges of our post-Covid-19 uncertain period ahead.

LVR restrictions were originally introduced in October 2013 and have been adjusted over time. They have become an accepted part of lending policy and process, although many have recently speculated there could be some tweaking, I doubt many would have seen a proposal for a “Carte Blanche” removal of the restrictions (even if only for an initial 12 month period).

This will, in my view, go a long way to retaining a level of stability and demand and hence limiting the impact on house prices.

I am NOT suggesting there isn’t going to be some impact on the demand/supply and hence, price levels. Although, what I am saying is that I am a little exhausted reading all the doomsday predictions on Facebook posts where it seems, everyone has become an expert….and yet, predicting the level of adjustment is just as dark an art as predicting the weather.. Make sure you understand the potential underlying motivations of some of these posters - particularly sponsored posts….

Aside from the fact that the impact will be very different depending on where you live/own property - i.e. Tauranga has the biggest port in NZ and from what I hear, it’s starting to hum again and this is obviously connected to the mainstay of NZ - food production (ag/hort/aqua etc), forestry etc - let’s not try and cover all the different variables in one post!

So, just staying focused on the LVR proposal being put into action - I genuinely think it’s a good move from the Reserve Bank. Credit where credit is due (pun intended).

Allowing flexibility around Capital Lending and LVR restrictions, I believe will assist in the likelihood of NZ trading through this and further minimize the impact on the most affected - and that in turn is good for the sanity and health of more New Zealanders.

I believe it’s good for first home buyers, existing property owners, those needing/wanting to trade up/down, and investors or prospective investors but I provide ONE example of how I believe it can benefit those that have lost jobs and need to sell and downsize or free up equity to get through.

Example: Let’s take a family whose life has been trucking along nicely. Mum is a Pilot for Air NZ and Dad has been running a Tourism Business. Both have lost their jobs. They need to reduce their exposure and want to sell their $1.5M home. They currently have a Mortgage of $750K. This is “Family A”.

Another couple (let’s call them “Family B”) - let’s say they run a modern Telco company - you know, things like Zoom (or you could replace this with Farmer/Avo Orchardist, Supermarket Owner etc) and they both have solid stable incomes. They have just had another child and want that bigger house. However, they only have $180,000 equity in their current home that they have an offer from an interested buyer to purchase from them at $900,000 (if you are wondering why they don’t have much equity - it’s because they invested spare cash into their business to make it what it is today and now have plenty of cash-flows and are building the equity up as they pay down their loan super fast given they are earning so much money..).

As a general rule of thumb, given Family B are not first home buyer, they would require a 20% deposit with a Main Bank Lender - $180,000 would only be around 12%. However, given the ability for lenders to make their own decision on whether this is a good bet or not, Banks could approve lending at this level and therefore, allow Family B to upgrade - after all, the bank is entirely comfortable with their income from their business even though they haven’t got 20% deposit.

This allows Family A not to lose the shirt off their back and retain a level of some normality for them and their young family while they work through this time and retrain (or get their jobs are back in their industry) and they can get back to work.

So, although there will be many that will simply see the proposed relaxation of LVR’s as a risky proposal and only of benefit to existing property owners and those with good incomes, that isn’t necessarily so in my view - I believe it’s good for all parties.

Here’s to Level 3 and the road back……..

#sogladihadanoverseasholidayinjanuary

#observelockdown

#dontbeatuplandlords

#bringbackringfencing