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Tighter rules on property investors unveiled

22 July 2016

An attempt by the Reserve Bank to put a lid on New Zealand's spiralling property prices will see property investors needing a 40 per cent deposit under tough new restrictions revealed.

Restrictions to lending limits on residential properties are also being extended nationwide with all new loan-to-value ratios (LVRs) taking effect on September 1. Read more here.

The Reserve Bank introduced LVRs of 20 per cent in 2013 to rein in the housing market, and last year it raised the limits to 30 per cent for investors in Auckland.

It will consult on the changes until August 10.

Harris Tate director and Tauranga Property Investors Association president Grant Harris unpacks all the information you need to know and the possible spin-offs associated for Tauranga in a Q&A styled format below.

What repercussions could these new lending restrictions have for investors?

It is important to distinguish between property speculators/traders and long-term property investors.

Whilst the new LVR policies will impact on all investors, they are likely to have a bigger impact on the short term speculators/traders than the long term property investors - especially those that have been in the market for a long time with large portfolios and access to high equity in their property portfolio.

If the LVR restrictions cool the price increases from property speculators then that will be a good thing. Reduced activity from any type of investor would also have a knock on effect for developer’s appetites to develop new properties.

While the restrictions will no doubt provide an opportunity for experienced investors, at the same time it is detrimental to new investors. The other LVR changes will also make it harder for first home buyers.

What could it potentially mean for tenants and the rental supply market?

Long-term investors buy property to supply tenants with places to live.

So, restricting investors will reduce the supply of rental properties and no doubt also have a knock on effect of increasing rent. And there are already supply and demand issues for rentals in Tauranga.

Tauranga's rental market is strong at the moment could the LVRs put investors off and why?

The restrictions are more likely to cool activity for property speculators/traders that have the intention of buying and selling within a short period of time.

Long-term property investors will still be affected, but will likely have access to high equity in their property portfolio if they have been in the market for a long period of time.

So, these types of investors are less likely to be affected.

At the moment is Tauranga considered to be a good place to invest why/why not?

Tauranga is a good place to invest due to the buoyant economy and its location.

But there is also lots of demand from those moving from Auckland or investors from other areas where they may find the property prices comparatively cheaper than, for example, Auckland.

However, the rental return on the property is of course a big consideration for the viability of the property as an investment proposition.

Do you agree with the new LVRs for investors why/why not?

Having prudent lending policies in place is a good thing. However, previous LVR restrictions haven’t cooled the market sufficiently.

There are other factors at play in terms of high house prices including, high immigration, high demand and low housing supply, and the “trickle-down effect” from Auckland.

Also, historically low interest rates are also stoking the housing market. 

Tauranga and other regional cities have seen a clear “trickle-down effect” from Auckland with Auckland buyers purchasing property in the regions, which explains the LVR changes are being rolled out nationwide. 

The Reserve Bank is also considering debt to income restrictions which would be sensible and assist with preventing newer investors (and first home buyers) from over extending in a low interest rate environment and then being caught when interest rates inevitably increase (whenever that may be).

The exemptions for loans for the purpose of constructing new dwellings is good. However, some banks are not lending on construction loans for investment properties.

What is the biggest challenge facing investors/landlords at moment?

Rising house prices will affect the investment return available on residential investment properties depending on the rental return for the property. 

Investors also have increased costs including, from higher insurance premiums and costs associated with new compulsory smoke alarm and insulation regulations. Ultimately, in most cases increased costs get passed on to tenants as higher rent.

Could some investors just sell up and what would this mean?

No, long term “buy and hold” investors are unlikely to sell due to LVR restrictions.

The new LVR restrictions won’t have an impact on those investors unless they are borrowing to purchase more property, and even then they may no doubt provide an opportunity for experienced investors.

High house prices will no doubt appeal to some investors who are looking to sell down part or all of their portfolio.