Corelogic recently published some interesting information regarding the impact of LVR restrictions introduced by the Reserve Bank.
LVR limits were first introduced late in 2013, limiting mortgages greater than 80% to just 10% of all new lending. In 2015, Auckland investment properties were required to have a 30% deposit. In 2016 this was increased to 40% and applied to all investment properties in New Zealand. In late 2017 the LVR limit on investment property was relaxed to 35%.
With two years of data since 40% deposits were required on investment properties, Corelogic said that all buyers had been affected by the restrictions, but some more than others.
The group that appears least affected are investors owning a large amount of properties. According to Corelogic, this group had increased their activity from 2012 (the start of rising property prices in Auckland) and maintained their activity despite the LVR restrictions.
However the Corelogic data shows that smaller investors, the vast majority of rental property providers, have reduced their activity since LVR restrictions were introduced.
The results led Core Logic to correctly determine that the LVR restrictions have had a measurable impact on the rental industry. This is reducing supply of rental accommodation which is bad news for tenants and the many people who would have liked to provide rental property as a means of securing their retirement savings.
With many people unable to invest in rental property, some more established, experienced and better capitalised investors have been able to benefit from the reduced competition. There is nothing wrong with that and is what the NZPIF predicted would happen as larger investors tend to have larger levels of equity and were therefore less likely to be affected by the LVR restrictions. In reality, it is good equity that is the key rather than a high number of properties.
However there have been positive outcomes for all existing rental property providers from the LVR restrictions. Higher demand and restricted supply of rental property has led to rental prices increasing at a faster pace than general inflation. It is likely that the effect of higher costs and increased regulation has also encouraged rental prices higher.
One significant cost that has not risen is mortgage interest rates. Usually when property prices are taking off, the Reserve Bank would increase mortgage interest rates to dampen demand, however LVR restrictions have made this unnecessary during this cycle. Higher interest rates usually effect everyone, however LVR restrictions only effect those with insufficient equity.
Mortgage interest rates are expected to stay low for longer than expected, so rental property cashflows and yields may improve as rental prices increase while property prices are relatively flat.
Another factor that will be interesting to keep an eye on will be net migration. The extremely high levels we have seen over the last few years were never going to continue forever. Recent information shows that Kiwis are starting to move overseas again, so it is likely that our population growth will slow down. By how much and how fast it will fall will be interesting to see.
Combining all this with the fact that we have been building more properties over the last few years, rental property providers should not continue to be hampered in providing people with homes.