David Hargreaves looks at the RBNZ's struggle to place new rules around banks' lending to housing investors

By David Hargreaves

Well, I thought it was a good idea.

And I even said so.

Back in the mists of time the Reserve Bank proposed changes in how property investors would be treated in regard to their borrowing.

Essentially the proposals meant that people who were buyers of multiple properties (the original idea being more than four) would be treated as business customers rather than residential mortgage borrowers.

There are two big impacts there: First, the investor can expect to be paying a higher rate of interest, and second - perhaps more crucially - the lending would have to be treated differently by the banks; specifically, the "risk weighting" for lending to owners of multiple properties would rise.

Risk weighting

The risk weighting is important when an individual bank is calculating its capital adequacy ratios. Low risk assets can be discounted, effectively in large part discarded from the calculations.

In terms of the risk weightings our banks currently give to residential mortgages, the most recent figures show the big four show averages of 24% at ANZ, 29% at ASB, 31.57% at Westpac, and 33% at BNZ. By contrast the risk weightings on residential mortgages at the so-called standardised banks such as Kiwibank, TSB, SBS and the Co-operative Bank, start from 35%.

So, in layperson's terms, only somewhere between around 25% and 35% of mortgage lending by value is actually being included when the banks tally up their assets in terms of calculating how much capital they need. Now, of course if you were to increase the risk weighting - as would occur with a change in categorisation to business loans - then the value of the assets calculated would rise - and the banks would need to hold more capital.

Not that the banks appear to have been pushing that argument in their dealings with the RBNZ of course, in so far as can be seen from the RBNZ's consultation documents on the subject. The banks have apparently talked, albeit with justification, about a range of technical difficulties - not least of these being if people with several properties also have several banks.

What happened?

But anyway, to put what has happened to date into some sort of perspective, here's a quick timeline in quotes of what the RBNZ has proposed, and how this issue has become a moving feast. 

September 2013: "If a bank has recourse to more than four dwellings owned by the borrower then the loan cannot be classified as a residential mortgage loan," the RBNZ proposed,.

December 2013 - and things have changed a little after discussions with the banks: "However, we are retaining a count based element in the determination of the boundary between residential mortgage lending and commercial property investor lending, although this will also include an income test. The count threshold, however, has been increased to five properties and greater clarity will be provided as regards the treatment of multiple dwellings within a property. The Reserve Bank is of the view that anyone with more than five properties, regardless of whatever other income sources or revenue streams may exist, should be treated as running a small business. To avoid further confusion, this would mean treating those loans as corporate property loans." The new rules are to apply from July 1, 2014.

June 2014 - and things have changed again: :"Because of technical concerns raised by stakeholders in relation to a couple of proposals, the Reserve Bank has decided to extend the implementation timeline for those items until a later date this year," the RBNZ said.

November 2014 - and still more change, as announced by Deputy Governor Grant Spencer: "We're talking about a rule if you have five investment properties, (but) we're not so sure that's the appropriate rule to adopt now. It may be more an income based rule. We're still discussing it further with the banks and will be consulting further in the first quarter."

The evolution of this tale can be seen through the progression of interest.co.nz's articles on the subject, which you can see  here and here and here and here.

As I said in an article earlier this month RBNZ figures show that currently around 30% of new mortgage finance is going to property investors and therefore perhaps around one in every three houses are being bought by investors.

We don't know of course how many of those would be captured by the RBNZ proposals, because presumably a fair few investors would have less than five houses.

Impact on banks

But it is a fair bet that any measures such as those originally contemplated by the RBNZ could potentially have quite an impact on the banks, the investors, and presumably the housing market itself. Yes, amid all the talk of the heated Auckland housing market and of the need for more macro-prudential tools (which these proposals are not - they fall within capital adequacy rules), here is a measure that could of itself definitely take some pressure off that Auckland market.

So, what are we to make of all the delays and apparent chopping and changing that's been going on with the proposals?

Clearly our central bank is meeting a fair bit of, er, resistance, to its plans.

Not surprising that.

Investors won't like the idea of having to pay more for mortgage money (and as well perhaps they might not like the greater scrutiny that such a system may imply for their house buying and selling activities - hello Mr IRD), while banks are most certainly not going to be overwhelmed at the prospect of having their capital adequacy ratios weakened, with a need possibly for more capital, plus there are undoubtedly administration costs and hassles attached to such a scheme.

More consultations

The RBNZ's promising an update on the proposals following more consultation with the banks in the first quarter, which of course we are still in.

But I don't think the future is looking all that rosy for the idea.

Here again we seem to have the central bank trying to do a job that the Government might more properly take the lead on.

But would the Government want to go against the banks and property investors? I think not. The banks are very powerful, while in the New Zealand context everybody who is not a property investor wishes they were, so in effect any measure against property investors is against everybody. Well, that's a bit of a simplification - but the Government knows not to mess with house buying.

I could be wrong, but to me the comments by the Deputy Governor in November suggesting that instead of applying to a certain number (more than five) of properties the new proposals may ultimately look to apply an income-based rule, suggest a wholesale watering down of the plans. We could see an income bar set so high that very few investors are picked up by it.

This would allow the RBNZ to say it had introduced new rules, without losing face, but really what would it achieve?

Go ahead as planned

Personally I would like to see this RBNZ plan go ahead as was originally intended. In the absence of a capital gains tax I think anything that does something to level the playing field in terms of property versus other investment types is to be commended as something that may help to avert boom and bust cycles.

I could be jumping the gun. The RBNZ certainly surprised everybody, including yours truly, with the boldness of its LVR speed limits.

But frankly with the central bank having once run the gauntlet of such negative publicity and sentiment and with no clear support from the Government, you wonder whether there is any real appetite for it to raise its head above the parapets again.