Currently the government is brainstorming ideas on how to squash the housing bubble before the bubble even begins. The idea is that the government would restrict the maximum Loan to Value ratio (LVR) that the bank could hold on your property, with 80% being the value currently used. However this idea would backfire majorly sending the country back into recession.
A recession is classed as when the country has negative growth. In order to have positive growth, the country has to have great business sentiment and people spending money. Starting up a business is high risk and banks tend not to lend very much towards start-up costs therefore the majority of business start-ups are funded by people borrowing against property they own, be it their own home or an investment property. If the government was to limit LVR then that would limit the amount of money people could pull out of their properties to sink into new business ventures, thus decreasing the GDP and raising unemployment. Not a good thing.
What’s more is that the next generation of first home owners would be kicked out of the market for good. With the median house price in Auckland being around the $550,000 mark, with a 20% deposit, first home owners would have to come up with over $100,000 cold hard savings before the bank could even look at them. This would mean slogging away for years trying to save, or waiting until a much-loved family member kicks the bucket and leaves them the deposit necessary. We are already classed as being unaffordable, do we really want to make it any more difficult for our first home owners?
And yet, the decision to alter the LVR’s wouldn’t affect property investors too much. Investors are trained up in how to make the most of other people’s money and know many different skills and tricks to build equity rapidly. Therefore it would be the investors who are already cashed up who would stand to make a small fortune if the government did adopt this policy. Sure they would lose some of their leverage from using greater amounts of the banks money, however they would still be able to make truck loads of money.
With limitations on first home owners buying property, rents will sky rocket dramatically meaning investors will be getting a much better return on their money. As rents increase yields will increase, thus attracting more investors (probably cashed-up overseas investors) which will result in increased competition pushing house prices up. The exact result the government was trying to stop.
Unlike homeowners who are emotionally involved and don’t want to share their home with anyone, investors understand the value of team work. Should the LVR restrictions come into play, investors will simply team up, combining their resources and knowledge to invest in property. This would result in greater buying power and greater knowledge which would result in smaller groups or companies being able to afford to buy up the majority of the housing stock.
Active investors who have the skills and knowledge in value adding strategies would be able to take advantage of these LVR restrictions. With yields increasing due to rent rises the smart investor would be able to buy a high yielding property with a 20% deposit, renovate the property to add enough value to pull their 20% out, whilst still holding a cash flow positive rental property with 20% deposit.
Vendor financing would then become a major source of finance for people looking to buy property. Be it through the vendor leaving behind equity as a second mortgage or be it through investors setting up lease options, the best way for people to get into a new property would be to be financed in by the vendor, once again creating a lot of profit for those who have the skills.
The whole idea is a joke to me and I do not think it will ever come in. It would create conditions similar to those in 2009, whereby shrinking the buyers pool, vendors would be limited to who they can sell to, and have to take massive reductions on their sales prices. It would see the gap between the rich and the poor grow exponentially and would create a generation of renters.