40% deposit requirement, what’s the impact… and what are your options?


Should investors be scared off by the Reserve Bank’s increasingly hands-on approach to the property market? Not necessarily, as there are upsides – it creates a safety valve against potential overheating, and gives rise to some innovative investment vehicles.

As investors, we Kiwis are used to a relatively unregulated property market. We’re renowned for favouring the solidity of housing as an investment – and our governments have by and large been content to allow the market to run under its own steam.

Clearly that’s changed. The introduction of loan-to-value restrictions for investors in Auckland last year (which was increased and expanded nation-wide in October) has had a noticeable impact. Residential investors now have to stump up 40% of the purchase price to obtain finance. As a direct result we’ve seen demand drop, suppressed price growth and lower auction clearance rates.

At the same time New Zealand banks have pressure from their parent companies in Australia to shore up their balance sheets; improve liquidity and build a buffer in case of a fallout in the property markets.

Is this a bad thing? Not necessarily. I think we can take comfort from the fact that these more cautious policy shifts are helping smooth the market, relieve some of the pressure and reduce the risk of over-heating. I don’t believe New Zealand has the inherent risks suggested by some. Ireland and the US have been cited as examples of what can go wrong if the envelope is pushed too far. But those fallouts were caused by a lax finance culture and massive oversupply. In New Zealand we’ve become progressively more cautious on the lending front and our supply crisis in Auckland is well understood.

Nonetheless, too much imbalance in the Auckland market may risk a rapid correction which is in no one’s interests, particularly investors. More caution from policy-makers can be seen as an insurance policy, providing some stability. Yes there may be reduced demand, but it’s relatively engineered.

So how is the market responding? It’s important to acknowledge that aside from access to credit, the other big driver of demand – net migration – has not died. There is some policy tightening in this area, but New Zealand will remain a place the world wants a part of. And we also have a constraint on supply. Because developers are finding it harder to get funding, they’re being forced to seek finance offshore – or put the brakes on development. We’ve seen a huge slow-down in development, both in the apartment and suburban market. Several large projects have been put on ice. The upside is that we’re unlikely to see a huge over-supply of property.

The take-away is that the property market is about the balance of supply and demand. Yes the LVR restrictions appear to have taken some heat out of the market. But for a dramatic fall in prices there probably needs to be an oversupply of property, and it’s hard to see where that oversupply might be. On the demand side, because the constraints are relatively engineered, if prices were at risk of too much softening the Reserve Bank has the option of easing the deposit requirements. Of course if the 40% deposit requirement was lifted it’s no guarantee that banks will respond and lend at higher LVR ratios – but nothing lasts forever and banks are notorious for one minute wringing their hands over a lack of liquidity, and the next having too much cash on their hands and suddenly asking when you’re going to buy your next property.

Meanwhile, how do we solve today’s challenge of how to get finance for the next property? Investors are already thinking outside the square. We’ve seen a huge upsurge in enquiries to second-tier (non-bank) lenders. And the LVR exemption on new properties (homes with a Code of Compliance less than six months old) has seen investors increasingly seeking out the new builds. I have been in vesting for 20 years and working with clients for 15 years, during which I’ve bought very few new homes. But given these restrictions and the fact existing property is now in such short demand, new builds have become an attractive option.

Just keep in mind that the LVR rules, aren’t the only tool in the Reserve Bank’s kit. They are looking seriously at debt-to-income ratios, effectively a cap on borrowing. The smart money is on this becoming a reality sometime next year. Like it or not, we’re in a period where the Reserve Bank will be taking a far more active role in the housing market. Rather than having an allergic reaction, it’s important to see this in a wider context. In Asian markets we know well – such as Singapore and Hong Kong, where I was speaking recently – the government routinely uses policy levers to influence the housing market. Investors there see it as a fact of life, and work with it.

Against this backdrop, we’re looking at how we can innovate to assist investors, including through syndication – pooling some of our clients together to buy both commercial and residential property. Commercial property will be targeting greater yield with good capital growth prospects. Residential will be offering the opportunity for a share of a company holding several quality properties in different locations.

You’ll need to qualify as a wholesale investor (as defined by the Financial Markets Conduct Act 2013) to get access to these opportunities. But if you are interested contact us now to get earlier access to these opportunities.

The returns are there, the stability is there – and the investment community now has an opportunity to get creative in how it embraces the ‘new normal’.

Where is the New Zealand Property Market headed?

  • Is investing in NZ dead? 
  • Will prices plummet?
  • What will the impact on your portfolio be, or if you don’t have one, does it mean its just getting too hard?

At Erskine + Owen we don’t think so. There are still ways to buy with a 40% deposit, there is still the potential for great capital growth, and there are still properties that are affordable. In Asian economies like Singapore and Hong Kong, regulation is frequently used to engineer the market. If it looks like we’re risking a rapid correction, the Reserve Bank can always ease the rules.

If you have an interest in property, our presentations on the current factors influencing the New Zealand property market will help you make better decisions to protect and generate your property wealth.

This New Zealand Property Market Update is presented by Erskine + Owen Directors Alan Henderson and Lisa Phillips – experts with long experience helping clients build wealth, and develop passive income streams through sound property investment strategies.


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Alan Henderson
Principal, Erskine & Owen