Reserve Bank, in order to tighten lending restrictions, admits it will be harder for first-time buyers to get up the ladder

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Some experts have said that the Reserve Bank itself is responsible for skyrocketing house prices after cutting the official cash rate (OCR) in March 2020 to stimulate the economy as COVID-19 spread around the world. They should go up in August before the final lockdown was ordered.

The Reserve Bank started consultations on the changes earlier this month. While industry representatives supported tightening LVRs, the public was more skeptical about whether this was necessary:

  • Homeowners have seen tremendous increases in equity, so they are not in immediate danger of owing more than their properties are worth
  • Banks must already “hold a certain percentage of the capital in relation to their risk-weighted assets”, so they should already be protected from “bad loans”
  • When bank borrowing becomes more difficult, people who cannot find alternative sources of credit are excluded from the market
  • LVRs would do little to curb house price growth (which the Reserve Bank agreed to)
  • the changes would “have a disproportionate effect on first-time buyers”, who usually have lower deposits due to the rapidly rising prices.

On the latter point, the Reserve Bank said it was an “inevitable consequence of addressing the financial stability risks we are currently seeing in the market”.

“We find that under the new conditions banks can still grant up to 10 percent of the new loans to owner-occupiers with high LVRs, and the majority of them to buyers of first homes,” says the summary of the submissions siad. “In addition, the LVR exemption regime allows buyers who qualify for Kainga Ora First Home Loans and those who purchase new housing to continue to borrow at higher LVRs.”

The bank said its other option – keeping the low deposit borrowing level at 20 percent but raising the low deposit threshold to 25 percent – would have had a greater impact on first home buyers than its chosen course of action.

In November, the Reserve Bank announced that it would open consultations on “introducing debt servicing restrictions” – making borrowing difficult if you are already heavily leveraged. This is expected to have less of an impact on first home buyers than those who already have mortgages.

“[Debt-to-Income limits] reduce the likelihood of mortgage defaults, while LVRs largely reduce losses for banks when borrowers default, ”the bank said in June.

Despite the temporary hiatus, it is still widely expected that OCR will increase in the coming months, making borrowing and servicing a mortgage more expensive.


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