Will the return of the LVRs stop house prices from rising?

OPINION: The property market is hot and LVRs are back on the table. Last week the Reserve Bank issued a statement saying they would bring planned LVR changes forward to March 2021, after originally intending no changes until at least May.

LVRs or Loan to Value Ratios are one of the economic levers the Reserve Bank has to heat or cool the property market. It appeared that making the announcement was the middle ground between breaking their promise not to change the LVRs for a year and the desperate need to cool a property market that not only survived Covid but has become significantly stronger.

The obvious issue is that, in the meantime, investors, who would most likely be targeted by the first LVR changes, were going to snap up properties while they could. An investor with $300,000 of equity or cash could buy $1.5 million worth of property with the current 80 percent rule but only $1 million worth of property with the new 70 percent rule. In some smaller cities, that’s the difference between three new investment properties and two new investment properties.

To stop this rush of purchases before March 2021, the main banks themselves have implemented the LVR rules. At the time of writing, only one main bank remains open to lending to investors at 80 percent, the others all adjusted their policy to maximum 70 percent within days of the Reserve Bank's announcement.

For first home buyers, LVR rules remain the same. If you are a good earner with good control on your expenses, 90 percent is still a possibility, even 95 percent. It’s likely the Reserve Bank will, rightly or wrongly, continue to target investment property buyers before first home buyers.

What will remain to be seen is where newly built properties sit in the LVR rules. New-build properties were exempt from the pre-Covid LVR restrictions to encourage developers to build desperately needed new stock. With the easing of those LVR restrictions in early 2020, the obvious benefits of buying new were lessened (although the benefits such as warranties and maintenance were still there).

But now that LVR restrictions are back, it will be interesting to see how the banks treat new builds.

The hot property market is a product of the perfect storm: low-interest rates, reduced LVR restrictions and general consumer confidence (most people who are still employed are confident they will remain employed). It’s unfair to blame the hot market on just investors outbidding first home buyers but putting restrictions on this area will help to cool the market a little without shutting down the market altogether.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.