RBNZ should 'adjust risk weightings on home loans'

Property

Kiwibank economists suggest the Reserve Bank should make banks 'reprice' higher risk interest-only and investor loans

25th Jan 21, 3:23pm by David Hargreaves

Kiwibank economists are suggesting the Reserve Bank should move to force banks to more highly price riskier home loans such as interest-only and investor loans.

The suggestion, aimed at cooling the scorching hot housing market, comes in the Kiwibank economists' weekly First View publication.

Until fairly recently the RBNZ had been widely expected to take the Official Cash Rate (currently at 0.25%), below zero, but a stream of stronger than expected economic data has changed that view. Much stronger than expected inflation figures released last Friday reaffirmed the new view that there will be no more OCR cuts.

And then there has been the housing market...

"The rampant run in the housing market has surely taken a negative cash rate off the table," the Kiwibank economists say.

"We now expect the OCR to be left unchanged, well into 2022. Market traders had placed bets on further rate cuts following the RBNZ's rhetoric last year. Now, market pricing of further rate cuts has effectively been removed and wholesale rates have been shunted higher. The Kiwi dollar has surged, with New Zealand's outperformance on the global stage."

The economists say that thoughts of further RBNZ easing "have turned to thoughts of RBNZ tightening via macro-prudential policy".

Already the RBNZ has signalled reintroduction of bank limits on high loan to value ratio (LVR) home loans from the beginning of March. The limits were removed on May 1, 2020 in the face of the Covid crisis.

The Kiwibank economists now say the next best step the RBNZ could take is a "reassessment, and bank repricing, of the risk associated with home loans".

Banks do much of their business in home lending because the 'risk weighting' rules allow them to hold less of their own capital against home loans than against for example business loans.

The Kiwibank economists suggest the RBNZ could adjust the banks' risk weighting on home loans "to better reflect the higher risk associated with interest-only and investor loans".

"Applying a higher risk-weighting on investor mortgages, forces banks to hold more capital against those loans, and ultimately price them differently.

"Someone walking into a bank with a 30% deposit, to upgrade their home, should receive a lower interest rate than a leveraged investor buying their 5th investment property on interest only," they say.

But they do acknowledge that any tweaks to mortgage rates won't fix the housing problem, "not even close".

"Attacking demand is not the answer.

"Fuelling supply is the answer.

"And fuelling supply is more a fiscal responsibility.

"The Government must step up, in support of the councils, to unlock land, build the infrastructure, and provide long-term plans to tackle our chronic housing shortage. A multi-pronged approach that provides certainty is needed to channel resources into housing development. We've heard the excuses. We know the solutions.

"We need to put our foot on the shove al-ready."

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43 Comments

by nktokyo | 25th Jan 21, 3:39pm 1611542378

Well, the investor probably has stacks of equity and income to be able get past servicing testing rates.

There's a very large lump of land sitting on Malfroy and Ranolf St corner in Rotorua that has been vacant for I don't know how long because council can't get services in to allow building. Hooray. Zero urgency or accountability.

by Officebound | 25th Jan 21, 3:46pm 1611542777

A great idea.

Goes after the froth in the market, and seemingly prices the risk more fairly.

Added bonus that it would be widely popular, and wouldn't have the government going against any of their promises.

Go!

by Yvil | 25th Jan 21, 3:48pm 1611542906

I believe the government are dealing with the supply side, they are projecting to build 8'000 houses for low income earners and that's on top of the 100'000 affordable homes they're currently building

by Nifty1 | 25th Jan 21, 3:54pm 1611543278

Think I've seen that on a Tui - "Yeah Right" billboard some where.

by Fritz | 25th Jan 21, 8:01pm 1611558103

Haha nice one

by PocketAces | 26th Jan 21, 7:23am 1611599035

Whatever they are doing, it is an eff of sight more than the last lot

by imhenry | 26th Jan 21, 2:48pm 1611625695

Open your eyes please

by Dale Smith | 25th Jan 21, 4:04pm 1611543896

"Attacking demand is not the answer."Fuelling supply is the answer."And fuelling supply is more fiscal responsibility."The Government must step up, in support of the councils, to unlock land, build the infrastructure, and provide long-term plans to tackle our chronic housing shortage. A multi-pronged approach that provides certainty is needed to channel resources into a housing development."

It is precisely this type of muddled thinking that perpetuates the high prices, even as supply increases. How it is supplied is crucial.

A classic example is the Greater Christchurch Partnership Committee, https://www.stuff.co.nz/business/property/124012007/houses-and-schools-… , with the councils identifying the land they are going to zone for future residential in advance.

Of course, developers already knew this so the land is now under cartel type control. Its value has gone up by 10/20x plus its raw land value. And in many cases will be land banked. WITH NO IMPROVEMENT, other than been given its monopoly/duopoly advantage by the council.

What councils should do is allow any landowner to present to council plans for a subdivision which would need to show how the infrastructure, environmental, built environment, urban design issues are covered and then let them go for it. The competition between developers will see an orderly hierarchy develop so those that can offer the best price and value will get the buyers.

The zoning for the land is given concurrently with its approved application. This stops landbanking.

Council would not have to charge as much for any DC to any outstanding issues, and because most land has the potential to be developed, then any land that was developed, would have been bought at close to its next best economic return, ie closer to the rural land price.

To zone land in advance is just stupidity, and command and control assertion by council planners.

by Kate | 25th Jan 21, 6:38pm 1611553092

Isn't what you are suggesting similar to a private plan change application, accompanied by a RC application for subdivision? I think there is already provision for both to be considered concurrently, isn't there?

by Dale Smith | 25th Jan 21, 7:34pm 1611556492

Vaguely, While there is a mechanism for this, if it is outside the council's' plan' then they are one of your biggest objectors. They don't object per se, but side with any objector, and the wording is loose enough for them to interpret it any way they want.

They are the judge when they clearly have a vested interest.

I have done a private plan change with a small regional council, where they were amazingly supportive, but most councils are not. We had the extra money to accommodate council requests BECAUSE we did not have to pay rentier prices for the land.

I have also been involved in one private plan change that took over 10 years to get approval.

What I'm talking about is a presumptive right to develop rather than a presumptive right not to. Thus while they may look similar at first view, the reality is over a doubling in the price of a section done the NZ way.

by GV 27 | 26th Jan 21, 6:57am 1611597443

This sounds like a good idea on paper, but it would also drastically worsen fringe development in Auckland in areas where this is no public transport and without any real imperative to add it in; this is already an issue on the horizon in North West Auckland. Do we need the houses? Yes. Is the government likely to ever implement rapid transit in the area? At this rate I'll be dead before it happens.

by Dale Smith | 26th Jan 21, 12:42pm 1611618135

It also works in practice, when allowed, but I agree Auckland City Council and its leaders are their own special basket case, but that is more the reason why the rest of NZ needs to crack on with it.

The trouble is, every other place in NZ is just an Auckland cluste$^@& awaiting to happen, and actually starting to happen as the price jumps in the regions show.

Why any other place would aspire to have Auckland's housing woes shows how dysfunctional and institutionalised the thinking is in NZ.

by Squishy | 25th Jan 21, 4:10pm 1611544214

No need to do that, the Reserve Bank are doing an excellent job and just need to keep imagining new ways they can prop up this asset bubble. With Adrian at the helm this bubble is going into permanent orbit.

by CWBW | 25th Jan 21, 4:42pm 1611546133

Investors should not worry about whether RBNZ will buy in to this turd. If your bank insist to be the sole winner in this game, just raise your rent and pass on the cost. Good excuse to slip in an adder for yourself and let the banks be the bad guys for your tenants. On the other hand, if you don't want the banks to win and still want to appear altruistic before your tenants, there are more than banks that will work this out for you.

After thoughts:

The recent propaganda by bank economists trying to lobby up interest rates is laughable. Probably their bonuses is at stake- given the current low interest rates environment squeezing their margins further. The argument presented by Kiwi bank in this case is a joke. If they can't accept the risk, they can simply refuse to lend. Yet they want to make that lucrative loan whilst denying risks to themselves; there's a word for it, it's called scumbag. Whether a person came up with 30% deposit or none makes little difference to the loan, a loan is a loan. A loan for a house priced at $1m with 30% deposit is 700K, a loan for a house at 700K with zero deposit is also 700K. The only difference is the one with the 30% deposit shared 30% of the risks and the 300K serves as a cushion for the bank as a guarantee against downside volatility. Banks have been playing this game since it's inception, they want to make money out of you while having almost zero risk to themselves with you bearing all of the risks.

by Audaxes | 25th Jan 21, 6:27pm 1611552447

The only difference is the one with the 30% deposit shared 30% of the risks and the 300K serves as a cushion for the bank as a guarantee against downside volatility.

Not just the banks. Depositors, including those that are in receipt of a residential property buyers' deposit to settle the sale of their asset, are also at risk.

According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.

by Contrarian | 25th Jan 21, 4:58pm 1611547136

Smacks of KiwiBank running to the Government for help in facing the Competition ?

by karl seastrand | 25th Jan 21, 5:48pm 1611550094

"Attacking demand is not the answer". Why the hell not??? It is far easier than finding another 30 000 homes every year just to stop things getting even worse.

by Pragmatist | 25th Jan 21, 7:49pm 1611557342

Unless you are promoting either massive overcrowding or mass graves then you really aren't doing anything about demand.

by Fritz | 25th Jan 21, 8:05pm 1611558311

Yeh.
I am cynical on these bank economists. They keep spouting 'supply, supply, supply' knowing full well it's futile.
I am sure they are not so dumb as to think a range of demand side measures can't help.
Which simply means they are cynical.

by Audaxes | 25th Jan 21, 6:01pm 1611550892

So it is irresponsible RBNZ regulatory oversight when:
Banks extend 60 % of their lending to one third of already wealthy households to speculate in the residential property market because the RBNZ offers them an RWA capital reduction incentive, to do so.

Which causes bank loan concentration risk since:
The creation of bank credit is the driver of household residential property price inflation.
Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $292,645 million (59.71% of total lending) as of November 2020 - source.

by Fritz | 25th Jan 21, 8:01pm 1611558064

Yawn.
Actually demand side eg. Much lower immigration IS part of the solution.

by Shoreman | 25th Jan 21, 8:12pm 1611558779

Maybe one day the housing issues will be sorted, how I don't know, when I don't know.
What I do know is housing issues around supply availability, cost affordability have been around for a long long time.
Anyone holding off for these issues to be fixed could be waiting for along time, forever ??
Bite the bullet or be a renter for ever, what should happen won't, those who have waited in the past all regret.
New Zealand is a very very sort after destination, our handling of the Pandemic has only thrown fuel on that fire !!

by Dale Smith | 26th Jan 21, 12:46pm 1611618397

Yes, I agree, you can only play the hand in front of you, even if you know the game is rigged.

But once most people have crossed to the dark side, then it is their best interests to support it, even though know it is wrong.

by RickStrauss | 27th Jan 21, 12:45pm 1611704731

Agree, this is as much an issue of morals and ethics in our society as it is policy.

At present we have pretty immoral exploitation of younger generations going on.

by Shoreman | 25th Jan 21, 8:20pm 1611559246

I'd say in the Banks eyes well capitalized investors as safer bets, interest only loans or not, at least there's an income from the property.

by gnx | 26th Jan 21, 5:10am 1611591014

Safer bets? That’s basically what the residential market is now... one big casino

Watch this video to understand the effect of interest only loans

https://www.facebook.com/thepropertyaccountant/videos/389506505567071/

Lending on the basis the capital doesn’t need repayment allows people to overpay for their investments/bets and creates unfair competition for people wanting buy a home for living in and raising families

by jasonnn | 26th Jan 21, 8:33am 1611603186

I follow that Youtube channel. His point in the video is to say that the example property is not a good investment. No real investor would buy that property.

by gnx | 26th Jan 21, 11:19am 1611613190

I don’t agree... it’s a classic example of a new build..

Don’t forget a third of investors make a loss of $8000 a year

So a third of the $180 billion lending is to loss making business, another third to break evan.... the country has been taken for a ride by the banks and business lobby associations

It’s a house of cards that will wipe out a generation of retirees and fhb’ers when it goes

by richard1965 | 26th Jan 21, 8:39am 1611603558

RBNZ will not do anything that in anyway may be detterent to housing ponzi as Mr Orr has made it very clear that it is in their interest that house price continue to rise as is the only economy in NZ.

They too understand that any ponzi scheme is good as long as it is on run and can just hope that it does not goes bust before their term ends - narrow thinking.

by Brock Landers | 26th Jan 21, 9:24am 1611606272

They have already forgotten that Dictator Orr and his goons doesn't see house prices as their problem (unless they were to drop of course).

Change will only come from Auntie Teeth and the Fat Controller clipping his wings, both of whom seem to have other priorities than saving New Zealand from stage 4 house price cancer.

by EmperorXi | 26th Jan 21, 10:12am 1611609159

Too bad Auntie Toothie has politically correct priorities else where....... hope all those working folks on rentals feel like morons now.
As for the ones living of hand outs, it makes no difference until the coffers are empty and benefits cut.

As for Orr, he's in a tight spot........ riding the tiger.

by Just a farmer | 26th Jan 21, 9:57am 1611608236

How about just making it easier for people to finance new builds. A scheme to fund lending while a house is under construction to allow the house to be bought as a turn key deal rather than a construction loan perhaps? Paying rent and a mortgage, or 2 mortgages undoubtably puts a lot of people off building a new house. Currently only certain construction companies offer turn key deals and it adds a fair amount to the house price as they don’t get cheap finance.

by pin3cone | 26th Jan 21, 11:28am 1611613707

- Or just don't lend to someone who doesn't even have a cash deposit and is relying on equity?

by Mark Hubbard 1965 | 26th Jan 21, 11:53am 1611615202

We really are a command economy (Gosbank) not a capitalist one.

Why are banks going to factor in risk when they are drawing down near free money from RBNZ to lend out? Risk premiums only apply to free market price discovery: RBNZ destroyed that long ago.

by Dale Smith | 26th Jan 21, 12:49pm 1611618564

Yes, a command and control economy, which local and Central Labour Govts. love.

by redcows1 | 26th Jan 21, 1:30pm 1611621025

Risk is just a myth someone made up years ago to keep people in line. Doesn't actually exist.

by Mark Hubbard 1965 | 26th Jan 21, 2:23pm 1611624220

Are you a fund manager or a banker?

by linklater01 | 26th Jan 21, 4:03pm 1611630193

Redcows,

I have seen many ridiculous posts on this site, but this is a prize winner. I would love to hear your explanation of risk being only a myth.

by Pusheen | 27th Jan 21, 1:01am 1611662460

Surely you can see sarcs when pop up, I see a kid from family decided to move out/disconnect when parent just favoring only specific child not much differ when govt & RBNZ as parents how they treated their citizens. Back to risk which can be mitigated/calculated.. but it's becoming a myth.. when the mitigation report came to you as rosy.. such as BTC, Tulips mania.. oh.. yea.. I'm sure you can type here, since not part of the sorry saga of 'okay to fly with minimum risk'.. but later on found to be on myth section.. with those unfortunate B-737 max.

by Cynicaloptimist | 6th Feb 21, 3:41pm 1612579272

Redcows: Sarcasm, as are many comments on interest.co.nz - sometimes I miss them too :)

by linklater01 | 26th Jan 21, 3:59pm 1611629978

Banks should not be allowed to allocate their own risk-weighting to mortgages. We saw how that worked out in the GFC.
Why are banks allowed to make interest only loans anyway? All loans should be on the basis of both capital and interest being paid over an appopriate period with say, a maximum of 30 years for residential loans.

by Pusheen | 27th Jan 21, 12:46am 1611661579

NZ public did not realise, what really most worried to any NZ govt at the helm.. it's just those bank cartels.
Every levers being pull in every direction by govt & RBNZ is basically to satisfy the club.
The funny things is when the club started to realise what is going to happen when binge stops? suddenly they uttering afraid of neg OCR, no to TD guarantee, no to CAR, self impose prudency into LVR, suggest different treatment for higher risk investors etc. - ngg.. why uttering it now? - what do they do the past 15-25yrs?
I'm not surprise if one of them start uttering the CGT or DTI even.. IF cartels said so? govt will bow to it.

by calis | 27th Jan 21, 9:55am 1611694523

Risk should be weighted to riskiness, not to political gain or to some idea of social justice.