LVR rules pay off for homeowners
Reserve Bank restrictions make it less likely households will face negative equity, writes Susan Edmunds.
Loan-to-value restrictions that made it harder for people to take out home loans with small deposits should protect homeowners from falling into negative equity. ‘‘Negative equity’’ refers to owing more money on a property than it is worth.
It becomes more of a risk in markets where house prices are falling and people have taken out large mortgages to buy in.
In February, first-home buyers took out $938 million in new loans and $371m of that was to people who had less than 20 per cent equity in their new properties.
There are predictions that house prices could fall as much as 10 per cent in the economic disruption caused by Covid-19, which could erode much of that.
But commentators said, even then, few households should end up underwater on their loans.
Reserve Bank data from last year showed that less than 1 per cent of mortgage debt in Auckland was in negative equity. But if house prices were to fall by 40 per cent nationwide, that would increase to 50 per cent of New Zealand households at risk.
That is down from 70 per cent in the same scenario in 2014.
Loan-to-value restrictions have generally limited owner-occupiers to borrowing no more than 80 per cent of the value of their home, although loans for new builds are exempt from that and Government-underwritten First Home Loans require only 5 per cent.
Investors have faced tighter rules.
The five big banks have 2.4 per cent of their residential lending at a loan-to-value ratio of more than 90 per cent. Another almost 5 per cent is for lending between 80 per cent and 90 per cent of property’s values.
‘‘Even with house price falls of 10 per cent, which is broadly in line with our current expectations, there’s only a small proportion of property owners who would have negative equity,’’ Infometrics chief forecaster Gareth Kiernan said.
‘‘These relatively low figures show the effects of the Reserve Bank’s loan-to-value restrictions over the last six years. The comparable proportions in September 2013 were 7.5 per cent and 13.2 per cent respectively, so the risks are a lot lower than they were then.’’
Economist
In 2009, it was calculated that 130,000 homeowners were in negative equity.
Nick Goodall, head of research at Corelogic, said price falls should be tempered by the assistance being offered by the Government, Reserve Bank and retail banks. This should stop people being forced to sell, which would drive down values.
‘‘Of course, we’d then need to revisit that view in three to six months when people’s mortgage deferral comes up as if people are still struggling with income and expenses then, then they may be forced to sell the property for less than previous, which could cause prices to drop, especially if demand is reduced due to continued uncertainty and a weak economy.’’
While banks can ask people to pay down their mortgages if their equity position changes, they are unlikely to do so.
Economist Shamubeel Eaqub said banks would extend terms, offer interest-only and repayment holidays instead.
‘‘It’s not good for anyone to force sales. But it means they won’t be so keen to lend.’’
Mortgage adviser Bruce Patten said banks had told him they expected the number of people in negative equity to be small. ‘‘So far no-one has really commented on house prices, because they just don’t know what the reality will be as we haven’t faced something like this before. It’s so different from the global financial crisis.’’
‘‘It’s not good for anyone to force sales. But it means [banks] won’t be so keen to lend.’’ Shamubeel Eaqub