Sallies call for RBNZ to provide banks with guidance to help curb risk-aversion when it comes to lending against housing with alternative tenures such as progressive & co-ownership

The Salvation Army wants the Reserve Bank (RBNZ) to make it easier for banks to lend against residential property with alternative tenures.

In a briefing to the Housing Minister, the charity said a “mature” housing market should have at least 20% of its stock comprised of alternative tenures like cooperative ownership, co-ownership, progressive ownership, community land trusts and build-to-rent set-ups.

It said New Zealand would benefit from a market that provided more “choice, amenity and affordability”.

The Salvation Army maintained the country's housing policy advisors had failed to look beyond the “dichotomy of private rental and public rental housing as the sources of housing for those on modest incomes”.

It also noted “the inertia of banks, which habitually lend to owner-occupiers and mum and dad property investors and see little advantage in venturing further”.

The Salvation Army suggested Finance Minister Grant Robertson directs the RBNZ to look at how its prudential banking standards constrain banks from lending against housing with alternative tenures.

Clarity needed

Its call echoes that of the Society for Alternative Housing Developments - a New Zealand advocacy and research group.

Its chairwoman, Greer O’Donnell, said the RBNZ could give banks guidance around how their banking standards could be applied to alternative tenures.

Specifically, private housing cooperative developer, Andrew Body, suggested the RBNZ could write to banks to clarify its definition of a “residential mortgage loan” under its capital adequacy framework.

The argument is that giving banks guidance would make it easier for them to consider mortgage applications and reduce the need for applicants to go through a costly legal process to try to convince their bank they don’t pose undue risk.

O’Donnell made the case ‘community-focussed housing’ can actually be lower risk because developments are conducted with sales secured in advance and future residents involved in the process.

She suggested the Companies Act could also be tweaked to specifically define a new category - ‘community-focussed housing entities’. This would further give legal recognition to alternative tenures.

Bank experts weigh in

Victoria University Associate Professor and bank capital expert, Martien Lubberink, said the issue for banks is accessing collateral.

In other words, banks need to be able to get something if the borrower defaults.

Blogger, Michael Reddell, who formerly held a number of senior positions at the RBNZ, said: “One of the problems with new tenure types is you don’t know how they will hold up in court and you don’t know what the economic characteristics are. So, it is to some extent [a bank] taking a punt.”

He acknowledged a lack of regulatory clarity was what held banks back.

“You can’t force banks to lend, but you can create an environment where it’s a bit easier to put some moral pressure on them and say, ‘Look, this actually feels like a robust and safe proposition for you, subject to reasonable deposit requirements, etc, so why not?’

“At that point, maybe you start getting one player who’s willing to take a bit of risk and look for a growth in market share.”

Reddell supported prodding banks and encouraging innovation.

“But equally I quite like the fact our banks are quite conservative because that’s why they don’t run into troubles,” he said.

Robertson only prepared to ask banks to support the ‘productive economy’ at a high level

Robertson said he hadn’t looked into the issue raised by the Salvation Army and co.

Asked whether he would consider asking the RBNZ to provide banks with guidance to essentially prevent them from taking a narrow view around what’s a “residential mortgage”, he said: “That’s a really interesting question, because obviously the Reserve Bank sees its role as setting the rules rather than making those decisions at the other end.

“What I am prepared to do is continue to talk to retail banks about how they can support the productive economy; how they can support the overall goals we all have for the economy of people getting access to housing.

“There’s an issue there around different roles in the economy and the Reserve Bank is quite clear around their view of that.”

Robertson has butted heads with the RBNZ of late, as contrary to his preference, it has decided not to put conditions on its new Funding for Lending Programme. Both Robertson and his National Party counterpart wanted the RBNZ to require banks to on-lend the low-cost funding they secure from the central bank via the $28 billion scheme to productive parts of the economy.

However, the RBNZ has consistently made the argument that putting conditions on the programme could restrict its uptake, reducing its effectiveness. While the programme looks like a liquidity tool, its purpose is to help banks lower interest rates to boost inflation and employment in line with the RBNZ’s mandate.

The RBNZ has repeatedly said monetary policy is a blunt tool and it’s up to the government to create policies targeted to specific sectors.