LVR exemption encouraging new builds

As you will all be aware, in October 2013 the Reserve Bank imposed restrictions on residential property lending. These restrictions limited low-deposit residential lending to 10% of all new lending. Low-deposit residential lending is defined as lending of more than 80% of the total value and is expressed as a loan-to-value ratio or ‘LVR’. An exception to the LVR restrictions is lending for new construction which is intended to cover all residential mortgage lending to finance the construction of a new residential property.

The New Zealand Herald has recently run an article highlighting the practical effects of this exemption on the housing market in Auckland. With the ability to borrow more than 80% of the total value and not impose on banks LVR restrictions it means that loans of this nature are more appealing to banks. As a result of this increased access to funding more Auckland home buyers are opting to purchase on the city fringes in new subdivisions/developments (click here to read the article).

Initially new residential construction was included in the LVR restrictions. This was because the Reserve Bank had indications that high value lending for new construction was minimal, therefore grouping new construction in the LVR restrictions would not have a material effect on housing development or residential development. Following subsequent consultation the Reserve Bank found that high value lending for new residential construction actually comprised a larger proportion of lending than initially thought and the LVR restrictions were having a more detrimental impact than was intended. The exemption for new construction was created to remedy this anomaly.

The above situation has been followed up by another article in the Herald today that emphasises the massive pressure on home prices created by the large demand not being matched by supply (click here to read today’s article). This article indicates that dangerous buying practices are occurring in order to secure a purchase; these include opting not to get a building inspection and purchasing after only viewing the property for a short period.

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