RBNZ mulling income based rule in push for banks to hold more capital against loans to investors who own multiple rental properties

This will be interesting. 

UK has just implemented a limit on lending to 4.5x income.

Will stop the negatively geared investors in their tracks.

UK has limted it to 15% on a number of loans basis (i.e not total value).  Would be a very bad choice to do the same here (use number of loans not total value of lending) as all banks would halt all small mortgages to low income families in regions to focus on very large lending to aucklanders (i.e all 15% of allowed loans will be given to aucklanders as this gives banks best bang (largest lending) per loan made at over 4.5x income).

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1114.pdf

How it's done in the UK

Make the default equity requirement 30% with higher LVR only available to owner occupied dwellings by way of statutory declaration. Set a prohibitive penalty for those who lie.

Owner occupied could be limited to cover primary and secondary dwellings for a family, holiday homes should be declared as such and should not count as being "occupied". Couples applying who own properties separately will be required to combine them on the application and all properties considered. Children under 18 or in education count as family occupiers as do elderly without property of their own.

The aim is not to penalise the rich here but deter the greedy. Like a bigger kid always does well in a lolly scramble, the little ones need to be given a chance to get a share without fear of being shoved aside.

At 4.5x income PI's in auckland would need to be running much lower LVR's than 80% unless they have a significant personal income.

e.g: $3mill property with 50% equity, 1.5mill loan, would require income of $330k p.a at 4.5x multiple. That would mean an 11% yield across properties which in auck is impossible.  Take personal income of 100k p.a, then required yield would be 7.7%, still highly unlikely in auckland. Any PI's more highly geared than 50% would need even more income/higher yields to get more lending.

Even a more seasoned PI (e.g 5mill to name from 15-20 years of PI) who has enjoyed tax free capital gains through the 2000's would be struggling to get more lending if the 4.5x rule came in.

e.g 10mill portfolio at 50% equity, 5mill lending, required income = $1.11mill, or 11.1% yield across properties in auck.  If has a job on say 110k, yield required still 10% across portfolio. 

That was just an example to show the sort of yields required if the 4.5x income restriction as in the UK came in.

Auck yields closer to 4%. Take 5% gross to be generous assuming investors buy lower priced, higher yielding properties:

So a property portfolio in auck of 10mill would return gross income of 500k, and if they were full time PI, with no job, then they would be sitting at:

* 16x income at 80% LVR

*14x income at 70% LVR

*10x income at 50% LVR

*4.5x income only occurs at 22.5% LVR; i.e of the 10mill property almost 8mill would need to be their own $

Number of properties is better for the country as it encourages the sale of lower value holdings to new entrants, and thus giving the average jo and FHB a step onto the ladder without damaging other folks.



SO



If RBNZ drops that in favour of Income based, then we know what's up (it's playing to government large holder cronism) and who's the team owner (not team NZ)

LVR limits on investors would be fantastic.

Steve Keen and I'm sure others suggested a 10 x annual rent limit on valuation for mortgages