Deposit rule needs review

The Reserve Bank, The terrace, Wellington. Photo/Mark Mitchell

The Reserve Bank's LVR rule, which requires residential home buyers to have a 20 per cent cash deposit, is hitting first-time buyers hard. How are our twentysomethings expected to save the $100,000 they would need to put down on a $500,000 home?

It seems to me that although the 20 per cent deposit is a fair idea to stop banks lending too much on property, it is preventing a large group of people buying their first home and stifling the bottom end of the housing market, preventing some sellers from trading up, which must have a knock-on effect across the market.

I wonder if first-time buyers should be let off the hook and be required to pay a smaller deposit -- say 10 per cent. That to me seems far more achievable for people who are likely to still be saddled with student debt as well as paying rent.

Another idea is for the RBNZ to introduce a 5 per cent deposit on homes selling for less than $300,000. That would help first-timers and provide a boost to the lower end of the housing market -- particularly in areas outside the country's property hot spots.

The 20 per cent rule is a blunt instrument that needs to be reviewed -- unless the RBNZ is anticipating a 20 per cent "correction" in property values and wants to protect the banking industry and home owners from having homes worth less than the mortgage.

Home loans

Last week I mentioned how the value of a mortgage was once restricted to three times joint income. So a person earning $60,000 a year could borrow no more than $180,000. It helped keep house prices in check and meant borrowers didn't get loans they couldn't afford to repay.

I hear Ireland has introduced a new lending rule meaning house-hunters there can borrow only 3.5 times their annual income. This places a strict ceiling on what can be borrowed and prevents banks throwing money at people -- which could risk their homes being repossessed if they borrow more than they can afford.

Some of Ireland's property pundits see this as a catalyst for change, predicting that property prices in Ireland's hot spots will cool as a result of the lending restriction.