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New owner-occupier mortgage holders have become less vulnerable to a housing market bust, higher interest rates or income loss since the Reserve Bank introduced the LVRs.
Tuesday, July 17th 2018, 8:00AM
by Miriam Bell
That’s according to a new Reserve Bank study, which looks at mortgage vulnerability and deposit affordability before and after the introduction of the first two rounds of the LVRs.
Concerns about financial system resilience in the face of rapid house price growth and heightened competition for new mortgage lending led the Reserve Bank to institute the LVRs in, first, 2013 and then 2015.
Prior to their introduction, the average LVR for new mortgage holders came in at approximately 67%, according to the study.
But by mid-2016, the study finds the average LVR for new mortgage holders had declined sharply to about 55%.
“This suggests a substantial increase in average equity buffers driven by a widening gap between median mortgage debt and median house prices,” the study says.
“The increase in average equity buffers is not necessarily due to the LVR policy as rising property values would likely have increased the average equity of movers even if the policy was not in place.”
Over the same period, the share of mortgage lending extended to new mortgage holders with LVRs above 80% declined from 60% to 35%.
The study says this provides evidence for the resilience benefits of the LVR policy, as households with lower equity buffers have a more limited safety net against a variety of risks.
“In the event of a decline in income or an increase in interest rates, households with lower LVRs have higher flexibility to restructure or refinance their mortgages.”
Alongside the decline in new mortgage holders with high LVRs, the study finds there has been a decline in the share of households with high debt-to-income (DTI) ratios.
The average DTI for new borrowers also declined from 3.6 to 2.9 and the share of borrowers with a DTI above four declined from 37% to 24%, it says.
“These trends suggest that new borrowers now have more flexibility to restructure their debt and are likely more resilient to a hike in interest rates or a decline in income.
“The decline in the share of high-DTI borrowers may be related to the LVR policy as borrowers with high-LVRs also tend to have weak serviceability.
“For example, low income borrowers may have difficulty assembling a deposit through savings and are also more likely to have high DTIs.”
However, the study also finds that the……….
Continue reading this article at the original source from GoodReturns.co.nz
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