The Reserve Bank is floating the idea of using its so-called macro-prudential tools to target housing investors.
The direct suggestion of doing this comes in an article in the latest Reserve Bank of New Zealand Bulletin by Lamorna Rogers, an advisor on macro-financial stability at the Reserve Bank. This comes hot on the heels of a Reserve Bank consultation paper issued last Friday, which raised the prospect of changing the treatment by banks, under capital adequacy rules, of various types of loans.
In the consultation paper the Reserve Bank suggested if the borrower is dependent on the income generated by the residential property dwellings to make principal and interest repayments, then the loan would be treated as a business rather than a residential mortgage loan.
Another option it floated is setting a limit on the number of dwellings that can be included in a residential mortgage loan. Under this option, if there are more than four dwellings used as security by the borrower, then the loan exposure(s) is business rather than a residential mortgage.
Such moves would mean the banks having to hold more capital against these loans, with banks' potentially passing on their increased costs to customers and/or possibly doing less of this type of lending. Also see David Hargreaves' commentary here.
One of the four macro-prudential tools in the Reserve Bank's arsenal, following a memorandum of understanding with Finance Minister Bill English in May, is the ability to adjust sectoral capital requirements, or increase the amount of capital banks hold against loans to specific sectors where the Reserve Bank sees sector-specific risks.
In her Bulletin article Rogers writes that the Reserve Bank's recent decision to impose loan-to-value ratio (LVR) restrictions on residential mortgage lending was driven by risks surrounding the housing market, and the likely greater effectiveness of LVR restrictions in dampening housing demand than other instruments.
"Instrument selection feeds into and overlaps with the implementation of the macro-prudential instrument(s). For example, it might be decided to target the intervention to reduce welfare costs, assuming it was still possible to meet a minimum effectiveness threshold. An example would be targeting housing investors," Rogers suggests.
"The Reserve Bank is improving its capacity to undertake targeted interventions. For example, new data collections are being put in place, which will provide breakdowns of housing lending by categories such as investors, first home buyers and businesses."
37 Comments
Probably MM. But as it relates to the vast majority of property investors I dont think the LVR limits have made any difference to them, as most have a tonne of equity in their own homes. Its the first home buyers who will have to rent for longer while they save their first deposit who bear this burden.
Haha... you people... clutching at straws. Before you start celebrating I'd read the details.
95% of PIs have less than 4 properties in a portfolio. So not effected.
"banks' potentially passing on their increased costs to customers and/or possibly doing less of this type of lending" - key words, potentially and possibly. Name me a bank that wants to lose market share?
There is a shortage of properties in Auckland to rent and buy, you make 5% of PIs sell, the remaining 95% enjoy higher rents. From this announcement they also hear, more stable banks and more stable investors = more stable market and a better place to invest.
The only thing that will stop prices going up in Auckland is to dramatically increase the supply and/or stop immigration. Tinkering will do little.
Yep, its going to make little difference, which is why the limit of 4 properties will have to probably be reduced to 2 or 3 if its going to have any effect at all on the overall market... still its just a discussion at this point... and rents will rise and the cost benefit of renting vs owning will swing in ownings favor, a good thing I believe...
"renting vs owning will swing in ownings favor" and you will have more demand to buy the same short supply of properties and prices go up. Buyers already have more of a deposit to save thanks to LVR restrictions, and now they will have higher rents to pay while they save. And when they finally have a sufficient deposit they have to compete with 1m more immigrants.
Which ever way you 'swing' it PIs win.
and as prices rises its relatively cheaper to rent and so the cycle goes on regardless of what they do... and as interest rates rise demand for rentals grows... Which is why I think they should ring fence property losses and at least end the taxpayer subsidy to PIs and put them on a level playing field with home buyers, beyond that I dont think the govt can make much difference, and even that will not make a huge difference in the long run...
Even if they have less than 4 they still may be caught out by the provision of whether it makes income (as Simon points out below).
Will this also impact holiday home owners who rent out their homes when they aren't using them, will this define those loans as 'business loans' as well?
I think its highly unlikely they will actually enact that for a whole host of reasons.
As an accountant I can think of ways around it just off the top of my head for most PIs, and it would change every time the interest rate changed... doesnt make sense in practise....
Well I guess its problematic, to start with whose income do we include? And over what time frame is that income assessed? How do we actually determine if they can afford principle and interest repayments or not?
Take me for example. I live in my own house that has no debt owing, so I dont pay rent either, as would be the case for many thousands of NZers. If I add my wifes income to mine the 3 rentals I own, I actually could pay the mortgage without any rent coming in, thousands of property investers with 1 or 2 rentals would say the same thing. How about a couple who buy a rental based on their combined income and then the wife goes on maturnity leave - does that mean the loan changes to a business loan? Who monitors this?At what rate/term is the principal supposed to be repaid? What if I had a loan on my own place - changed it to interest only and took in a border, I've just increased what I can afford, then kick out my border - does my loan change to a business loan? What if I resign my job and are without personal income for go on holiday and then look for another job - does my loan change to a business loan then? And when would it change back?. And as house prices go up whats to stop me refinancing and paying for the repayments that way? Do you count capital gain on my own home as income, as it changes my equity, therefore changes my borrowing power therefore changes what I can afford? And how about if I borrow money from my parents (or anyone, or another lender) for a deposit so that I can afford the reduced mortgage amount - is that included? And if interest rates go up at what point does it change to a business loan? How do you see this working? How many property investors - most of whom, like me, aren't highly geared do you think it will be effecting?
My point is that in real life it just becomes so very complex. It would be much simplier for the RBNZ to set an LVR limit of say 70% for rental investment houses and to treat anything above that as a business loan (or easier just cap it at that full stop), and even that would not be without problems.
They may be caught out but what if the bank doesn't change the terms of thier loan because they don't want to lose the business? What if they're fixed? So nothing changes.
Even if some sell you are just bringing me back to my original point, the less rental properties there are out there the higher rents go, PIs win. A supply shortage is only fixed by increasing supply.
Regardless of whether banks want to not lose the business; if the Reserve Bank makes it a condition of the registration they simply will not have a choice in the matter.
If the supply of rentals is reduced, short of demolishing the house, that still leaves the same amount of properties available; it will either be bought by an occupier (freeing up another rental) or by another investor.
The Reserve Bank is playing an interesting game, taking aim quite pointedly at the demand for credit.
Exactly, every time any policy action is discussed all the PI's come out saying "rents will go up!" which is utter rubbish.
The only thing that makes rents go up is an increasing shortage of housing stock or fewer people occupying each house.
Policy changes do not make houses or people living in them disappear, what they do is change the desirability of renting vs owning at current prices. What adjusts is the PRICE not the number houses or the number of people!
Common sense..??? Really.... ?? What has happened to the idea of the relationship between interest rates and risk..???
Since when did a Central Bank get so myopic that they start interfering in a particular mkt....I find it bizarre...
Mortgages for house are what they are because of the "risk ".... Business loans are much higher because of the inherent "risk".
Banks love houses as collateral... because they are relatively liquid and values tend to be sticky to the downside... ie. they are a safe asset.
I have a brother in law who is rich.... he can get business loans and Mortgages for commercial properties at cheaper rates than I can get a home moprtgage...... He can negotiate with a bank because he is low risk and borrows large sums...
Isn't that what Capitalism and the free mkt is all about..????
I understand the logic of LVRs' in regards to prudential policy .( banking system stability)... But i can't make any sense of the Reserve Bank wanting to make a distiction between a house that is owner occupied or a house that is rented.....
Sounds very.."Big Brother" to me......
Whats a business rate and whats a household rate and what's a private rate ?
Banks lend what they can and how they can lend on the day. Not by artifical catagories.
Once upon a time, and a long time ago, the great lurk for the cunning and connected was to buy something wholesale. Thats been gone for decades.
Targetting invesotrs is just plain dumb , exactly who is going to provide housing rental stock ....The Taxpayer through Housing New Zealand?
I think not , the state cannot afford that , both fiscally and because it cannot afford to worsen the already burdensome culture of dependancy
PI's have never provided housing stock, they stand in between first time buyers and home ownership. While they are able to shut first time buyers out of the market they rent a house to them. The rental housing stock they provide is only required because PI's have bought those houses in the first place!
It might surprise you but nearly everyone is looking to pay as little as possible when they buy a home, it's not just property investors who like bargains.
The point is irrelevant anyway, it's not what you pay for that one house that impacts the over all market. What matters is that the property an investor buys is taken off the market resulting in more competition for fewer properties, that's what drives prices up.
The fact that you bought properties 10 years ago also changes nothing. More properties tied up by investors = fewer owner occupiers = more first time buyers competing over fewer properties = higher prices.
Imagine if 10% of the population owned all the houses as investment properties. The remaining 90% of population aspiring to own a property would have to compete fiercely with each other if they wanted to secure one. The current situation is worse in that investors are also competing for the remaining stock although granted they don't yet own 90%
Yes some people choose to rent and yes we need some PI's to service that need. My position is not an extreme one although to get my point across it may appear that way at times. My issue is that the balance has tipped way too far towards investment properties and away from owner occupiers.
The majority of renters do want their own home and would love the chance to clean up that mess and turn a do-up into their own home. A chance you have now denied them.
I'm all for policies that tip the balance back towards home ownership. Forgive me but I feel more sorry for the tennant locked out of the market than the Poor PI purchasing their third or fourth home. No one is denying supply issues need to be addressed but let's not ignore the over investment in rental properties by PI's.
Jultz - it is not PI's who are denying FHB an opportunity to buy and do up their own home.
It is red tape and bureaucracy.
Many people have tried to point out to you the issues of supply and demand but you seem very unwilling to acknowledge the supply and demand issues.
Any policy that restricts supply causes prices to increase. Council restricts supply and the new LVR's are going to restrict credit. You need to broaden your perspective and understanding on these issues if you truely care about house prices or else you are a part of the problem.
People who do not believe in the free market as being the best model, develop and implement policy that creates supply and demand on a whim. They sell their policies to the ignorant people who believe in them on election day. It is emotional rubbish that has to capture a majority on election day. We have a situation in NZ where one group of idiots on the opposition benches develop policies and target them at the lower income populace and the current Government developing policy that assists big corporates.
There is not one Political party who develops policy that is respectful and equal for all people. To develop such policy would require the absolute goal of abstaining from interventionist policy in all market areas. Everything is supply and demand even idiots and intelligence is affected by these two factors. If people have a problem with housing affordability then they had better look within themselves and see what and whom they have been electing. It is people's dishonesty in not allowing freedom that has created the problems and the smart money has been able to take an advantage from those who are dishonest at election time. The Greens and Labour polluted the environment, sacrificed their supporters on the alter and ensured any clean-up was going to take years and years. All this rubbish can only occur as idiots do not understand the fundamentals of the documents that make up NZ's constitutional framework.
Jultz if you take out PI's then you will create tent cities.
Zanyzane & notaneconomist - you make good points regarding all the other buyers out there who are pushing prices up and all the supply issues that also contribute to the unaffordability issue. I don't disagree with you but because of your personal interests you appear unable to see the significant impact that PI's are ALSO making.
The issue of excessing investment and speculation by PI's is the topic of this thread and is currently getting attention because it has been ignored for so long. I am not aware of any other country where property investment is without restrictions and without specific taxes of some kind. The simple fact is the percentage of home ownership is on the decrease and the percentage of investment properties is on the increase. Properties locked up by investors are no longer available to first time buyers, it's not rocket science!!
Neither of you seem to appreciate that in a supply constrained market any additional demand can cause prices to sky rocket. Why should we ignore the significant demand coming from property investors??
Jultz - You make an assumption that I have a personal interest in PI. I have a portfolia of investments none of which is currently invested in NZ rental property. Personally I believe residential property to be significantly over-valued but I do not see this over-valuation being corrected by any drop in prices now or in the future. The mechanisms at play will not allow any price correction. There are many influences that have affected pricing and these influences will not be dealt with so property will keep increasing.
PI are actually pretty low paid for all the work that is involved. PI requires a longer time factor to get a good return but after a certain period can achieve reasonable results.
PI play a significant role in price stability as they factor in and analyse different data sets of information in the industry that the normal home-buyer doesn't consider.
NZ'ers need to consider having diversified portfolios and not keep all their eggs in the one basket in the one country. Too many people in NZ rely on their only time investment as being their job which holds them poor.
Zanyzane wrote "Your emotional need to have that house at whatever cost"
Not in New Zealand. From the start of the week people may recall I had noticed that if you add up the added household borrowing in Ireland it explains all the prices rises in their housing boom, but if you add up all the added household borrowing in New Zealand at most it can only explain 1/3 of the rise in prices.
To add to that, to the end of this week I managed to put together a series of data for the U.S.A., and it shows exactly the same pattern as Ireland. It is the NZ housing market that is the different one. In NZ it is mathematically impossible for the majority of the increase in house prices to have come from borrowing in the same way as Ireland or the U.S.A.
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