A week ago (at time of writing), the Reserve Bank announced a re-introduction of 40% deposits for existing properties for investors and 20% for homeowners. New build LVRs are 20%.
It is interesting to consider why this happened. In April 2020 the entire country was in economic lockdown, facing an uncertain economic future. The Government did what they had to do: Interest rates were slashed, quantitative easing introduced and LVR rules scrapped as economists predicted house price declines and business confidence to drop. Instead, New Zealand has largely been Covid free. The Government has moved aggressively to contain subsequent outbreaks. So with money cheap and international travel off the board, Kiwis have spent money on houses.
The re-introduction of LVRs is not surprising; the housing market had been moving too quickly for the Government and central bank not to intervene.
My main message for those frustrated with the change is that we have been here before, many investors kept going and they are invariably in a great position now. Property was and still is a long-term game.
You might find the impact of this change on you is lower than you had thought. Most property investors purchase using excess equity in their own home or existing properties, which will have increased strongly in value in the last 12 months, which should help with some of the extra deposit requirements. I believe the statistics are showing a 20% annual increase in values in the last 12 months.
Perhaps your progress will be a bit slower or you will need to change your approach on strategy or market. Many will remember that the last LVR increases ignited a property boom in the regions as people shifted their sights to what they could afford. Those who kept on keeping on are in a stronger position for it.
I knuckled down during the last high-LVR phase and what I was able to build up to has set me up for life. I took the opportunity to add
value to older properties and increase rent and equity because I had to.
First of all – if you are not able to buy and have existing property, then now is a good time to look at improving or developing existing assets to bring you up to a position where you can keep moving forward.
You might also consider new builds. Buying new is always popular; New Zealand needs more homes and the gap in deposit requirements will help new investors to get into the market. Just be careful with assumptions about future leverage, a broker explained to me that once a property is tenanted it will no longer be considered “new” for refinancing to buy your next property, so you will need 40% deposit against it.
On existing houses, remember that the LVR change does not mean that renovating, adding value, subdivision, cash flow, development, remodelling, building, relocating or any other aspect of property investment has changed or become less valid. In fact, I predict those strategies will become even more popular as investors look for assets where value can be added, allowing them to progress to the next deal and build.
You might buy a property that you can improve and sell, in order to raise capital to grow your buy and hold portfolio. Trading is a different style of investing to buy and hold, so do your homework. Speak with your tax accountant first before going down this journey.
The LVR changes are a stabilising measure, since the banks are in the business of writing loans and making money. Once the market stabilises look for the lending rules to change once again – with those investors who stayed the course through this time the stronger for it.
This article was published in the March 2021 issue of the New Zealand Property Investor Magazine and is shared here with permission from the magazine.
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