Even still if you paid $200k deposit on a $1mil house and the house drops to $900k, your LVR increases from 20% to 22.22%, so your situation gets better. The bank gave you the loan originally based upon the $50k being part of the original $800k total loan. If you've paid it off but then draw down on it again you are no worse off than when you first got the loan?

The bigger issue is what happens when houses increase in value faster than you're paying off the capital with a 30 year loan, which I imagine thousands of people are in that situation in Auckland right now, and so they are dropping below 20% LVR just by nature of unsustainable property growth. There's no widespread issues in the media of banks foreclosing on houses because they are <20% LVR due to property growth, so I imagine that no one cares (right now). I wonder if the banks are in breach of their LVR restrictions because of it.