LVR — more than just a risk to banks

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The Reserve Bank’s Loan to Value Ratio (LVR) policy came into force on October 1. You will recall this is where no more than 10% of a bank’s lending can exceed mortgages of more than 80%.

There has been plenty written and commented on about it, and whether or not it will curb property price rises and protect home owners and banks from a property collapse, should one ever occur.

We will have to wait and see whether the policy works, and only time will be able to tell us that.
In the couple of weeks leading up to October 1 we started getting calls from members (and non-members) concerned that they were feeling the effects of the LVR policy on their construction businesses.

Some had lost potential contracts and clients were walking away from discussions as they no longer had certainty of mortgage finance, so couldn’t proceed.
This was a direct result of the banks withdrawing pre-approvals and not entertaining any more high LVRs in order to get their lending books in order — or face the wrath of the Reserve

Bank and have their banking registration withdrawn.
We undertook a very quick survey to see what the impact might be across the membership and potential effect on construction in general.
Some members had seen no change, and they have never been busier. Others had been affected significantly, and expected to continue to be as a high proportion of their business were clients with low deposits.

We were aware of one company whose exposure is around 50%, and others in a similar position. Lenders, too, had seen enquiries dry up, and sales of completed new home enquiry was also affected as potential buyers disappeared from the market.
It is very difficult to get good quality data on the percentage of high LVR mortgages for new builds but, anecdotally, it seems to be somewhere between 10% to 15% of all new construction sales.

Extrapolated out, that means some 2000 to 3000 homes a year, based on our current construction numbers for 2013 (which will see about 20,000 new home consents issued) are at risk due to the new policy. Clearly, not all will be affected, but a number of things worry us.

Reduction in new house supply is counterproductive to the success of the LVR initiative and cooling house price increases. Indeed, increasing supply is the long-term answer as bringing new homes to market faster to meet demand when it spikes balances the demand/supply equation and reduces rampant value growth.

This relies on land being available first, and until that happens we will continue to fail to address the underlying problem.
The other thing that concerns us is how the banks will treat construction lending under a high LVR scenario. We know high LVR mortgages are more complex than loans on existing homes.

Funds are released as the home is constructed. It takes a long time, and clients can be exposed more than normal because they’re often paying rent and other costs during the construction period.

From experience, banks tend to back off somewhat when the market is weak. They’re concerned about over-exposure during periods of negative property values or no growth, and I guess this is understandable.

So we are concerned banks might prefer lending high LVRs on existing homes, at least in the short term, and until things settle again. This will put further pressure on supply and building firms who have gone through five years of recession.
It has been said to me that these firms will have to change client types, but at the end of the day there is still up to some 3000 homes at risk that were not at risk before.

We have spoken with the Reserve Bank and the Treasury and, in conjunction with BRANZ, are undertaking an industry survey to try and better understand the impacts of the LVR policy on new builds.

So when you see the survey (if you haven’t already) please fill it out as we believe there are real grounds for new homes to be exempt from the policy if the effects are too significant.

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