'Don't expect LVR relaxation to cushion house prices' - CoreLogic

Monday, 16 January 2023

CoreLogic head of research Nick Goodall says the best guess is that future debt to income ratio restrictions for home buyers will restrict lending to six times a borrower's income.

Investors and property owners should not expect any relaxation of loan to value ratio restrictions to cushion house prices this year, CoreLogic says.

CoreLogic chief property economist Kelvin Davidson said the most likely scenario was that the Reserve Bank would start considering loan to value ratio (LVRs) restriction changes in its November Monetary Policy Statement (MPS) and look to relax them around March next year, when it was expected new debt to income (DTI) restrictions would be brought in.

“In other words, giving with one hand and taking with another in early 2024,” he said.

“This shift in the policy mix might help first home buyers a bit more, because they find it harder to raise deposits, and hampers investors a little, because they borrow at higher DTIs more often.

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CoreLogic head of research Nick Goodall said the best guess was that DTI rules would restrict the amount a buyer could borrow for a home to six-times their income.

Davidson said when LVRs might be relaxed was a recurring topic of conversation.

LVR restrictions cap how much a bank can lend relative to the purchase price of a property.

The last time the Reserve Bank relaxed LVRs was at the start of the pandemic.

The move is widely acknowledged to have prompted the buying frenzy which resulted in house prices rising 42% over two years, as first investors flooded into the market to grab an additional property while restrictions were eased, and then first home buyers sustained the rise, fuelled by FOMO (fear of missing out).

LVR restrictions were put back in place in March 2021 and then tightened to try and stop the frenzy and curb any threat to financial stability that the overheated property market represented.

“Current LVR levels mean investors mostly require a 40% deposit while owner-occupiers generally need a 20% deposit, although new-builds are exempt,” Davidson said.

“Nobody I’ve spoken to is realistically entertaining the idea that the Reserve Bank would remove LVRs altogether anytime soon, but it is possible that they’ll be loosened eventually – perhaps by reducing the deposit rule for investors, for example 5% of loans [could require over a] 30% deposit, rather than the current 40% requirement.

Davidson said he didn’t think this was likely, however.

“The current housing downturn isn’t triggering major financial stability risks, such as widespread mortgagee sales, and technically those would have to be apparent before looser lending rules would start to be pondered by the Reserve Bank.

“Indeed, in a falling housing market, looser LVRs might actually create their own risks, for example greater chance of negative equity if people only require small deposits.”

He said loosening LVRs when the Reserve Bank was trying to cool the economy and fight inflation was also counterproductive.

Independent Economist Tony Alexander says as long as the Reserve Bank’s goal is to slow the economy and reduce inflation, it will not relax LVRs.

“There have been suggestions from time to time that LVRs should be removed or relaxed to help more first home buyers get into the market.

But it was not the Reserve Bank’s job to concerned about LVRs hampering one buyer group over another, he said.

The CoreLogic Buyer Classification series continued to show first home buyers’ market share was holding up well, he said.

Even if LVRs were relaxed, Davidson doubted buyers would flood back, partly because consumer confidence was at record lows, and banks were staying cautious.

Independent economist Tony Alexander said there was a chance LVR restrictions may be eased this year, particularly as low consumer confidence was already keeping spending in the property market low.

“It doesn’t look like extra special effort needs to be made to restrict bank lending in this current environment, which is what the LVRs are aimed at doing,” he said.

Alexander said as long as the Reserve Bank’s goal was to slow the economy and reduce inflation, it wouldn’t relax LVRs.

A recent survey of mortgage advisers found demand from first home buyers and investors remained as negative as it had for most of last year.