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The LVR speed limit - crippling or merely cooling the market

The Real Estate Institute in their monthly report for October stated in headlining their report that "LVR Restrictions Impacting Sales Volumes" - they went on to say "sales volumes eased back in October following the introduction by the Reserve Bank of restrictions on high LVR lending". The actual sales in October were 6,778 which was up 2% on a year ago, that month of October 2012 was up 32% on the prior October of 2011, which itself was up 28% on the prior year being 2010. So in the space of 3 years sales volumes are up 74%, in fact the level of 6,778 is the median for the past 21 years. 

Property sales growth is slowing - looking at the trend of monthly sales as compared to prior year we are coming to the end of a run of 30 straight months of growth in sales year-on-year, by no means the longest run, but a strong recovery from the property crash of 2008 as the chart below shows. Typical towards the end of a long run of growth comes more erratic variance as the growth begins to turn negative as we are seeing in the October figures.

REINZ monthly sales var.png


Added to these factual statistics from the Real Estate Institute was the monthly survey of real estate agents published by the BNZ and initiated through the Institute. This survey which I have mentioned before could be a vital sense of a pulse of the property market as the Institute represents almost all licensed agents. Given that it is a shame that from the population of close on 10,000 such low reporting of the monthly survey occurs. This month the survey looked for verbatim responses to the statement "What effects have you noticed from the LVR rules?". There were 247 responses published by the BNZ report. A quick count up had 180 of these comments showing a very pessimistic view on the impact of these LVR changes and the impact on first time buyers and open home attendance as well as performance of auctions. Here is sense of the responses:

 auction rate under the hammer has dropped dramatically

number of first home buyers in the market has decreased markedly

More very frustrated Vendors

Majority of first home buyers dropped from the market

Drastic decrease in competitive bidders/bidding

Massive decrease of first home buyers

Definite drop off in first home and migrant buyers

Huge decrease in people looking at property

A lot of Sale and Purchase agreements are not going unconditional or if they are it is at a cheaper, 
renegotiated price

Massive reduction of attendees at open homes

Overnight no enquiry from first home buyers. they have been scared away


Reading through these and the other verbatim comments reflecting a net 72% negative you would soon become depressed about the future months of property sales with a sense of up to 30% decline as that has been the often quoted component of 1st time buyers. However the reality is there is no accurate source of data that shows what 1st time buyers actually represent of the market so any prediction of effect is largely guess work, and the views of agents from what is a very small sample - just 247 from 10,000 (2.5%) should be taken with a note of caution.

There is though data from the Reserve Bank that reports the weekly levels of Housing loan approvals of both new mortgages and re-mortgages. Such data provides vital opportunity for analysis as I have done in the charts below.

RB actual mortgage approvals.png

This chart shows in the red line the 4 week moving average of the number of housing loan approvals made by trading banks. The last few weeks of October certainly showed an accelerated decline, however the trend as best seen in the grey line being the 12 week moving average shows that volumes had been declining since a peak in May of this year, however they still remain around 6,000 a week.

The next chart shows the trend of volume comparing the 4 week moving average year-on-year. This chart certainly would seem to show a picture of the announcement of the decision to implement the speed limit of high LVR triggering a slowing in volume of new housing loan approvals, in effect reversing a period of recovery which began in July, although as with the prior chart the longer term trend still shows slowing growth.

RB mortgage trend.png

We will need to wait until at least the November sales figures and more likely until the new year as well as to study housing loan approvals before the definitive statement can be made as to the true impact on the changes as a consequence on the high LVR restrictions, indications certainly show an impact, though that impact in sales is not huge as yet.

Former CEO Alistair Helm is founder of Properazzi.

Comments and questions

Recent data is showing unsold properties (via auctions) are on the increase since the introduction of LVR. This really shatters the common myth that foreign investors (read: the ever unpopular Chinese) were bidding ridiculous prices and grabbing all the properties they can. If the Chinese were slobbering all over the Auckland market, the success rate of auctions would have remained high with no statistical effect whatsoever.

Back in the 1970s to 1980s, the local Chinese were seen to be poor and originate from the 'takeaway' stock. In the 1990s to 2000s, it was the rich and obnoxious Hong Kongers. In the 2010s, the mainlander Chinese were seen to be so greedy, they are 'borrowing renminbi at low interest rates, driving up all the auction prices and leaving the poor Kiwi families homeless'.

Perhaps we should re-consider the long held sinophobia and its myths.

The Chinese are still picking the eyes out of Auckland, in the better Grammar Zone suburbs. the stories you are hearing of houses not selling at auction are for the outer suburbs, but to make headlines the journalists won't tell you that.

Lets forget the jingoism for a moment, Diggles.

Banks have always shown a willingness to fuel, with easy loans, any market that forgives yesterday's mistakes where players can readily on sell to a bigger fool.

Likewise, hot risk money is always willing to play on that housing Block because it is both liquid and profitable, and the same (aussie owned) Banks are willing to lend to them too against the interests of the genuine home owners.

So what has happened here, more likely, is that the punters have also fled that market when the supply of over funded student debt carrying spoilt brat Gen-Y no savings yet home owning wannabes was spun around by the reserve bank's handbrake 180 degree turn.

And speaking of the Block, it was a fab cautionary tale that 3 of the 4 wannabe couples made wages for their 10 week efforts, and the 4th couple made the most mainly because their development had the best underlying land and position.

That's also a good lesson for anyone considering an apartment or body corporate taxed "investment" with little land ownership rights as bullet proof upside.

In my opinion. We will see an increase of properties listed with the asking price and particularly between $300 - $500k mark which is the price point that appeals to first home buyers and the like. Auctions will still be dominent in the more established suburbs and at the higher price points. In short 2nd or third houses( that are to be purchased by existing home owners ) which will have more than 20% equity in the existing property.

This makes it more appealing for home buyers and provides the certainty when doing the required house , building and finance checks. No doubt banks are only giving pre approval when buyers are interested in purchasing a particular house.