Don’t blame LVRs for lack of affordable housing

Published in Insights, The New Zealand Initiative’s newsletter, 26 September 2014

This week, the New Zealand Herald ran a couple of stories about the young generation being shut out of the housing market. The newspaper even had a snappy name for these poor Gen Y’ers who are resigned to the fact that they will never own a home: “property orphans”.

There is no doubt that people in their 20s today find it much harder to get a foot on the property ladder than their parents. The Herald articles suggest that the Reserve Bank’s Loan to Value Ratios (LVRs) are to blame, since they require home buyers to have substantial deposits in order to qualify for a mortgage.

Property expert Alistair Helm was quoted saying that “if a person was earning the average wage, about $55,000, and wanted a $500,000 home, they would need $100,000 for a 20 per cent deposit – a total that would take 10-plus years.” The calculation is obviously correct but does that mean that LVRs are responsible for Gen Y’s housing woes?

I am not the greatest fan of LVRs, for two reasons. First, I do not think it should be the Reserve Bank’s job to prescribe to commercial banks to whom they should be allowed to lend. Banks should be able to make those decisions themselves based on their own criteria, of which the size of the deposit is only one among others. Second, evidence on the effects of LVRs gathered by property information provider CoreLogic indicates that the new rules did not have the dampening effect on the property market that was desired.

Having said that, the reason why Gen Y is shut out of the housing market has little to do with deposit requirements. Blaming LVRs for unaffordable housing is a bit like blaming the thermometer for having a fever.

It makes good sense for homebuyers to have a substantial deposit before entering the market, not least because it protects them from falling into negative equity in case the market falls.

The real reasons why first-time buyers are finding it hard to buy homes and save for deposits is that household incomes have not kept pace with increases in house prices. It is really as simple as that. The cure for this problem can therefore only be to ensure that in the future it will be the other way around. We need policies that increase household incomes and reduce house prices.

If we do not work on these parts of the equation, we will never be able to restore housing affordability – irrespective of whether the Reserve Bank sticks to its LVR regulations.