Mark Lister: Dropping LVRs would be stupid

Now we've seen a bit of weakness emerge in the housing market, the calls for removing the current loan to value ratio (LVR) restrictions have started. I hope nobody takes any notice.

Sales volumes have fallen off a cliff, and prices have had the wind knocked out of them.

This is great news for first-home buyers, probably the best they've had in years.

As each month passes and prices drift lower the required deposit falls a little further, as does the eye-watering mortgage they'll need. While prices stagnate the savings account of the first-home buyer is getting healthier by the week, it's not a bad recipe.

You can't blame the real estate industry for suggesting the LVRs be removed, their interests in keeping the juggernaut rolling on are obvious. The issue is also on the radar of politicians, which is equally unsurprising given the election is just around the corner with housing an extremely contentious issue.

But why on earth would the Reserve Bank want to remove these restrictions just as they're starting to do their job as hoped?

It's a bit of a red herring anyway. I doubt the LVRs alone are responsible for the collapse in sales volumes, the even bigger decline in the number of auctions, or the fact Auckland prices are in negative territory on an annual basis for the first time in years.

The usual winter slowdown as well as election uncertainty are the other reasons that are regularly cited. I'm sure they're also part of it, but how about interest rates rising from the lowest levels we've seen since the 1960s? That's kind of a big deal too.

Banks have tightened up on lending, mostly because it's being forced upon them by regulators, but maybe there's a sliver of common sense creeping into their thinking too.

Last but not least, the clampdown on financial conditions in China is almost certainly a factor, albeit one that is so difficult to pinpoint it's regularly underappreciated.

Removing the LVRs would be a stupid idea, plain and simple. It might help get a few prospective homeowners over the line immediately, although it wouldn't do them any favours in the longer term.

First-home buyers should be hoping this all continues for a while longer. The best outcome for them is that prices fall further, and then languish for a period.

That might flush out some fickle investors, and wake a few other people up to the fact that house prices aren't a one-way bet.

Borrowing more than you can afford, at the top of the housing cycle, when interest rates are artificially low isn't going to put many young families on a firmer footing.

In a few years' time maybe some of those locked out of the market will be grateful they were forced to delay their first foray onto the property ladder. We'll have to wait to find out if this current weakness is just a winter slowdown, exacerbated by election uncertainty and mortgage restrictions, or the start of something more sustained.

If it's the latter, some disgruntled first-home buyers may need to thank the Reserve Bank for the LVRs, and for saving them from themselves.

- Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile at craigsip.com. This column is general in nature and should not be regarded as specific investment advice.