Why you need to take advantage of the new LVR requirements and buyer’s market now
At the end of last year, the Reserve Bank made some alterations to the loan to value ratios (LVR) that banks typically use when lending for mortgages. The new LVR restrictions have been loosened enabling developers to borrow 65% of a property’s value (up from 60%).
Although this isn’t a huge shift – when combined with the current ‘buyer market’ conditions, the housing stock deficit and the fact that Auckland’s population continues to grow – there are significant opportunities for developers who move fast.
The impact LVR restrictions have had on the Auckland property market
The Reserve Bank sets loan to value ratios to control markets. The LVR is the amount of loan versus the value of the property that you have. For example, you might have a $100,000 loan from the bank on a house that is worth $200,000. Your loan to value ratio would be 50%.
In October 2016 the LVR for investment properties was changed from 80% to 60% to try and cool the property market by reducing borrowing and land banking. What that essentially meant was that you needed 40% value upfront, before you could take out a mortgage.
This did two things:
1. Cashed a lot of developers out of the market because they couldn’t afford to build.
Big developments are difficult to do if you can’t leverage up to 80%. Finding 40% on a $4 million property isn’t easy. This has slowed down the supply of new homes.
2. Cashed out a lot of property investors.
The investors are the ones providing rentals which is an integral part of the market. Not everyone’s going to be able to own their own home, so you’ve got to have rental supply. Reducing the LVR to 60% essentially forced landlords who typically own a lot of rentals to hold their stock and not buy more because the risk was too high.
So, while the LVR restrictions may have cooled market demand, they also slowed down the supply of new houses and rental stock which has exacerbated Auckland’s housing problem.
The reality is that Auckland desperately needs developers and property investors to help solve the housing crisis.
The recent alterations to the LVR restrictions seem to indicate an acknowledgement of the critical role that developers and investors play in bringing supply to the market. Although small, the loosened LVR restrictions have released some equity for developers. On a $5 million development, for example, you can take another 5% of that ($250,000) and put it elsewhere.
As a result of the change, the attitudes of the banks have also relaxed somewhat, particularly when it comes to first home buyers. The banks can see a big issue on the horizon. They understand the fundamental economic issue that Auckland’s population is continuing to grow at a rapid rate and the market isn’t supplying enough houses to meet the demand. This will have the inevitable effect of increasing property prices further, making home ownership even more difficult. So that’s good for developers because a lot of them are doing developments aimed at first home buyers.
Take advantage of buyer market conditions
At the moment we’re in a position where the property market in Auckland has cooled off with reduced demand, creating a buyer’s market. A buyer’s market means there are more houses available for sale then there are buyers, so there’s less competition.
Someone selling their property in a buyer’s market is going to have less interest. As a developer and investor, this is a really good time to strike. You know you can negotiate good prices and longer settlements.
Longer settlements give you time get your designs done and consented before you settle. Then when the market ramps up again, you’ll be ready to build.
As a developer it’s important to understand that despite what the media say, the fundamental issues facing the Auckland market aren’t going away – these are:
1. Auckland is still growing by approximately 50,000 people per year (last year alone Auckland’s population was estimated to have increased by nearly 43,000 in the year to June)
2. There aren’t enough houses for Auckland’s current population
3. Houses aren’t being built fast enough to keep up with population growth
4. Auckland is a desirable world city
This means it’s unlikely that we’re going to be in a buyer’s market for an extended period of time. The market is likely to flip more quickly than it would in other markets. I predict that in two or three years the market’s going to be hotter than it was.
We’re in what I call ‘The London Effect’. We’ve just got too many people and not enough developers, so property prices can only go one way – up. If you’re in a position to take advantage of a slower market now, you’re likely to be rewarded on the other side.
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