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Prices, demand, and lending restrictions

For the last few weeks, coronavirus has kept us stuck in our homes. For many people, this forced stay-cation will lead to a re-evaluation of their living situation. If you live with family or flatmates, you might be freshly motivated to buy your first home. If you’re in a smaller house, you might suddenly feel the need for more space. If you’re in an apartment, finding a house with a garden might seem more important than ever.

But, as the COVID-19 crisis continues, house prices and property investment will be affected. If you’re thinking of buying your first home or moving into a new one, it’s important to think about how the crisis could change your situation.

We’re not predicting a huge drop in house prices – no matter how much first home buyers would like it. Prices may fall in some parts of the country but rise elsewhere. And changes to lending rules may make it easier for some first home buyers to get a loan – and harder for others.

Regional variations

House prices always vary by region – and the impact of the virus is likely to exacerbate that effect. Because the tourism industry is most affected by the virus, tourism-heavy areas such as Queenstown and Rotorua are likely to see a downturn in house prices as a result of widespread job losses and people moving elsewhere. If owners of holiday rental properties choose to sell up, the subsequent glut of properties for sale could also contribute to falling prices.

In other regions – particularly Auckland – it’s likely that prices will be stable. Demand for property is still high in these areas generally, which isn’t likely to change. In fact, if people move from other regions in search of work, increased pressure on the rental market will fuel demand for property even further.

Affordable interest rates

Interest rates influence housing affordability, which in turn has an impact on prices. At the moment, rates are reasonably low, making mortgage repayments more affordable. For many people, this will make it easier to stay in their homes, even if they lose their jobs or face a reduction in income. This means there’s not likely to be a glut of houses flooding the market and lowering prices.

Low interest rates also mean more people can afford to buy, increasing demand for property. Increased demand, along with a limited number of properties for sale, means prices are likely to stay around their current level in many parts of the country.

Loosening LVR restrictions

The loan-to-value ratio (LVR) is the proportion of a property’s value that the bank is prepared to lend. At the moment, most banks will let you borrow up to 80% of your property’s value if you’re a home buyer, and up to 70% if you’re buying an investment property. That’s not likely to change during the crisis.

There have been no major announcements from banks about changes to LVR so far, and that makes sense. As a result of the crisis, many people are struggling to pay their mortgages now – loosening LVR restrictions would mean more people struggling, and banks losing more income. Instead, most banks seem to be taking a conservative, wait-and-see approach to the crisis.

Although general LVR restrictions won’t change, many banks will likely lift the cap on lending to first home buyers. This would give these buyers more lending and interest-rate options, potentially making it more affordable for them to buy their first home.

Tighter lending criteria

Another impact to look out for is changes to lending criteria and documentation when you buy a property. At the moment, most lenders require proof of income and deposit, but don’t look into your financial circumstances very deeply. That could change.

Banks and other lenders will likely start looking at the industry you work in as well as your income. If you’re working in a vulnerable industry that has experienced high numbers of layoffs and business collapses, that could affect your loan application. If you own your own business, you’ll face scrutiny of your accounts and your ability to survive the recession as well. In some cases, you may be able to take out income protection or redundancy insurance to gain approval, but it will depend on individual bank criteria.

Change and stability

Although COVID-19 will impact on the housing market in some ways, we’re not expecting a massive crash in house prices. Some areas may have a downturn, others will stabilise, and changes to lending criteria may make it harder for some people to get their loans approved. As always, buying a house means thinking carefully and seeking expert advice – and that’s where Global Finance comes in. If you’re not sure whether to buy, sell, or wait a bit longer, we can help with expert advice and insider knowledge.

Get in touch to book a free consultation with one of our mortgage brokers.