By Bernard Hickey
The Reserve Bank has again delayed plans to require banks to hold more capital to back mortgages to rental property investors with more than five properties.
A bank spokesman told Interest.co.nz the rule that was due to kick in from next month would now be delayed until the first half of 2015 while the regulator held further talks with bankers.
The bank initially proposed in September 2013 that banks would have to classify mortgages for property investors with more than four properties as commercial loans from July 2014. This would have forced banks to put aside more capital to back the loans, which the banks said would be difficult to implement and potentially drive up interest costs for rental property investors.
In December it made various changes to the plan, including changing the threshold for tougher capital requirements to five properties from four. See David Hargreaves' article on those changes here.
The plan was launched in tandem with the bank's high Loan to Value Ratio (LVR) speed limit, which critics have said favoured equity-rich rental property investors at the expense of first home buyers.
On June 13 the Reserve Bank released its summary of submissions on the changes to bank regulations and announced the sections relating to the classification of rental property loans would be delayed until December this year.
Banks and others argued the rules were impractical given many investors had loans with several banks and were linked to a variety of legal vehicles, which would be difficult to track or collate information. One bank estimated it would take it 18 months to develop the internal modelling to calculate the capital requirements for such loans under the Reserve Bank's approach of allowing banks to use internal models for risk weighting of assets.
Here's what the bank said in June:
The Reserve Bank understands the technical difficulties banks have in implementing the rule and proposes to delay the introduction of the clarified requirement to allow for more time to consider the issues that have been raised and to fine-tune the nature of the requirement. That said, some of the timelines proposed by respondents, such as delaying the implementation by up to 18 months, are unduly lengthy. It has therefore been decided to postpone the implementation of the capital treatment of customers who own and let out multiple properties, i.e. property investors, until December 2014.
The Reserve Bank held a workshop with bankers to discuss the proposals in October.
In response to a question from Interest.co.nz, a Reserve Bank spokesman said on Monday: "Proposed changes to banks’ asset class treatment for mortgage loans to residential property investors that was scheduled for December 2014 is now delayed until the first half of 2015."
"The extension to the timeframe is necessary to work through some technical aspects with industry and may include a further round of consultation," he said.
10 Comments
Another RB daft idea kicked for touch.
Around a third of NZ homes are rentals so annoying the investor class will bounce straght back onto the renters .
Landlords should be thanked and appreciated for the good work they do in housing so many people at cheap rates and who would otherwise be in the street.
Landlords are leeches on society. They have come to expect a subsidy from the taxpayer in the form of rental support . They compete unfairly with prospective owners because the taxation system makes it all possible.
I have no problem with landlords who have nil borrowings because they are not using borrowings to subsidise their untaxed capital gain.
Time to get real and balance the tax deductibility of loan interest with the gross interest paid by owner occupiers.
Witness the difference for commercial owners where investors are on a totally equal position to the owner occupier who costs in either the rent or the borrower interest for deduction with IRD and can also decide their use of working capital.
Social housing agents are not so keen either.
He said community providers could now rent houses from private landlords and rent them out to tenants who qualify for the income-related rental subsidy, which keeps the rents for tenants at 25 per cent of their incomes and pays providers the difference between that and market rents.
But Mr Jeffries said housing subsidies were not an acceptable replacement for actual ownership of social housing, even though his Community of Refuge Trust already rented half of its 190 homes from private landlords.
"Landlords tend to sell up. Investors move on," he said.
"It's about security. It's about our ability to provide quality and well-maintained houses. It's about overcoming market discrimination against social tenancies. We contemplate withdrawing support if the money from sales is not reinvested back into social housing." Read more
This could be relatively simple to achieve in a completion backwards way.
First up I don't believe 4 or 5 properties make a speculator, any more than the one where you live does. I couldn't care less about the affects on those who feel they need to own more than 1 property for their own residence.
So, by default all residential loans secured by the property to be classified as commercial with only a declaration that they are "owner occupied" allowing access to the higher LVR. A trust does not live anywhere so they just pay the full whack.
Simple checks could be made to ensure that individuals and their spouses/infant children do not have more than 1 property declared, that would be treated as fraudulent use of a document.
Landlords are fine, they buy cheap, invest commercially for profit and are honest about it being a business.
Residential property speculators are the emotive pestilence who bid up the bubble, negatively gear it all and play the big game of "keep away" to doom those who just want a home to the outer fringes. The less encouragement they get the better.
Of course they could always try commercial property, or would that be too scary?
The RBNZ needs an Edward de Bono ( http://edwdebono.com/lateral-thinking )
Start by levying every mortgage with a 1% payable to IRD monthly. - (cash flow negative so it is a real incentive on yield and hence market price). Of course the 1% is nominal and variation in rate could be a valuable tool to correct the investor appetite to compete with owner- occupiers
Only if you can prove you occupy that property for over 9 months each year you get that 1% back.
Serves other purposes too.
a. Increases the tax revenue to allow better services or cuts in other taxes.
b. Will help hold property values back to bring into line with rental return.
c. Helps aline residential property returns with other investments
d. Better than CGT because it hits the owner every month.
e. Absolutely no need for the RBNZ or any retail bank to find out how many properties are controlled by any owner. Could be implemented immediately or telegraphed a few months to allow investors to adjust their portfolios
"Residential property speculators are the emotive pestilence who bid up the bubble, negatively gear it all and play the big game of "keep away" to doom those who just want a home to the outer fringes. The less encouragement they get the better."
I would consiser that rather a biggoted veiw.
One thing many over look.. most rental property inverstors are also buying renonovating and flicking on...its not a huge profit...so do we expect this upgrading (renovatining is a poor description)o0 the national housing stock to be done for no return?
Can wwe expect this upgrading of the stock to be able to be carried out by 1st home buyers, already streached to the limit, and unlike 40/ 30 yrs ago, able to increase their share value with such a low inflation?
A huge proportion of the increase in price of houses is not because of speculators, but because they may spend 20 to 40K bring the property back up to reasonable std, then after taxes, GST, commissions etc, take 5 or 10 grand ...
Has anyone considered that maybe the upgrading of these properties in poor repair, could be of long term benieft?
Also they are not just a quick flick...but rather where sealing of bathrooms was not orginally a building requirement, they meet these stds, insualtion, upgrading electrical and pumbling, roofing....
And what would the consiquinces be it this was not happening to a housing stock that was/ is in bad repair?
Maybe become a tax payer burden, like leaky homes, except on a larger scale??
Am I into renovationg. or rentals ...no never had done so.. this is just commonsence... even thu most 'speculators' dont even reslise themselves when asked
What you describe here is case in point,
"rental property inverstors are also buying renonovating and flicking on",
Nothing about that is investment, it is pure speculation for capital gain. I also take issue with the upgrading statement. The aim is to spend least, slap the neutrally coloured lipstick on that pig and drag it into the auction zone where the plebs can scrap over it. Claims of altruistic upgrades don't fly as they stop abruplty when they meet the end of the enforceable building standards and what is the baseline required to attract buyers.
I am constantly amazed at the naievity and lack of common sense displayed when buyers pay tens and sometimes hundreds of thousands more to a speculator for fresh paint and fittings than they would have had they purchased the property and had the work done themselves.
I don't have any problem with this occuring, but I despise the dishonesty that it is "investment" or that it enriches our society in any way when it serves only to transfer wealth without the creation of anything new.
My view, If you wish to make your fortune in residential property it should be in the creation of new dwellings and not just from churning the existing stock for speculative gain. Higher capital requirements for non owner occupied residential property may be a useful tool for this.
Try and imagine what the property market would be like, right now, if the lever-pullers had decreed by regulation, that all residential property purchasers who were not nz citizens could only purchase new-build houses. Company and Trust structures are not nz citizens. Just like the Australian Govt decreed long ago. They did it. No trouble. Not hard. Think of the benefits
And .... a new-build is not a knock-over and re-build
Seems that u spend far too much time around cowboys.....or want a bees in for a quick buck....Funny thing is the professional 'competion' has been doing this for yrs.. the cowboy fly by nighters end up with morgagee sales themselves.
Yep u are right, there is not a lot of profit when done right...or wrong...which is why a single couple operation will turn over 10 to 12 houses yr...have 3 to 5 rentals....which may get sold on and replaced with selected renos... and one partner wil have a full time job.
Crunch the numbers and that ends up a household income up around the $150K +whatever coms off the rentals, not including any capital gains if a rental is upgraded from a reno...
And it is like any reasonable income, some long hrs and hard work...
Seems some critics of those doing this may have a bottom line problem with long hrs and hard work for reasonable return and long term investment , retirement goals.
Oh and lets not forget the social influence.. where upgrading lower income areas, means more diserning tenants, and those who can afford to pay more....which has an on going influence to dispoable income, spending and growth locally...
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