What would loan-to-income limits do to the property market?

The many Aucklanders who have chosen to use residential property investment as a wealth-builder will be very aware of the recent changes in how they achieve their financing. The speed limits put in place by the Reserve Bank of New Zealand (RBNZ) required Auckland investors to pony up as much as 30 per cent of the house price in a deposit before being able to take out a home loan.

This was put in place in an attempt to curb the rapidly rising values of Auckland housing, due in part to the continued lack of supply the city has seen. However, it appears that there has been little obvious effect, as values continue to grow and have now also began creating a ripple effect for Tauranga and Hamilton.

While this has proven particularly beneficial for property investors who have caught on early and jumped on board, there is increasing pressure to slow down these enormous increases in the name of affordability. So, if the loan-to-value limits aren't working, could loan-to-income values do the trick?

Are the speed limits really working?Are the speed limits really working?

Following in the footsteps

One limit for Auckland investors, another for elsewhere in New Zealand.

The idea of loan-to-income ratio (LIR) limits aren't new, as they have been used overseas in the UK and have seen some success. In essence, these limits would only allow people to borrow to a certain proportion of their income; in the UK's case, this was 4.5 times the person's annual salary.

However, the real question is whether this is suitable for New Zealand, and in particular, Auckland. Considering that the most recent Demographia International Housing Affordability survey listed Auckland housing as costing on average 9.7 times the median income, it appears that the 4.5 multiple would not quite cut the mustard for the majority of Aucklanders. The median person would not be able to borrow enough for the median home!

Of course, this number could be adjusted for Auckland, or even to only specifically target property investors rather than owner-occupiers, in much the same way the LVR operates. One limit for Auckland investors, another for elsewhere in New Zealand.

Singling out Auckland

"If the rule is only applied in Auckland it will accelerate the pace of price rises in the rest of the country"

However, Tony Alexander from BNZ argues that LIRs are unlikely to happen, particularly those that would specifically target Auckland.

"If the rule is only applied in Auckland it will accelerate the pace of price rises in the rest of the country," he said.

"From an affordability point of view it is hard to justify applying the rule outside Auckland and effectively removing any hope for most young people of buying a house unless prices fell sharply."

Furthermore, Alexander continues to describe that if such limits were introduced to the banks, that will not stop investors from heading to third party lenders in order to access larger loans, albeit at higher interest rates. Because residential property is showing such strong returns at the moment, this would almost be an inevitability. There would be no price slowdown as a result, only more debt for those who choose to invest. The opposite of what is intended.

It is far more likely that the LVR scheme will be extended. Perhaps the 30 per cent requirement for investors spreading to the rest of New Zealand while 50 per cent limits are imposed in Auckland, as Alexander predicts. The LVR limits are already in the macro-prudential toolkit, while the LIRs are not. However, the RBNZ has been known to spring things upon us, such as the recent cash rate cut, so everyone in the property sector could be in for a surprise.

Let's hope it isn't a nasty one!

Here's to your financial independence!

Daniel Carney
Authorised Financial Adviser / Investment Property Expert

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