House prices: Reserve Bank hits go on tough new loan-to-value ratios, warns of housing correction

The Reserve Bank has warned that the overheated housing market is at growing risk of a correction and it will re-introduce Loan to Value Ratio rules at the tougher end of expectations.

The rules mean most investors will be required to have a 30 per cent deposit from March but that will rise to 40 per cent from May.

Most other own occupier buyers wil require a 20 per cent deposit.

LVR restrictions were removed in April 2020 to ensure they didn’t interfere with Covid-19 policy responses aimed at promoting cash flow and confidence.

“Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace,” said Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand.

“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.

“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn.

As a first step, from March 1 LVR restrictions wil be reinstated at the same level they were set at prior to the onset of COVID-19.

But a further tightening of investors’ restrictions takes effect on 1 May.

The two step process was necessitated to accomodate the operational capabilities of the bansk.

From 1 March 2021:

• LVR restrictions for owner-occupiers will be reinstated to a maximum of 20 per cent of new lending at LVRs above 80 per cent.

• LVR restrictions for investors will be reinstated to a maximum of 5 per cent of new lending at LVRs above 70 per cent.

From 1 May 2021:

• LVR restrictions for owner-occupiers will remain at a maximum of 20 per cent of new lending at LVRs above 80 per cent.

• LVR restrictions for investors will be further raised to a maximum of 5 per cent of new lending at LVRs above 60 Per cent.


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