RBNZ says it's looking at 3 possible ways to categorise mortgage loans to residential property investors

RBNZ says it's looking at 3 possible ways to categorise mortgage loans to residential property investors

The Reserve Bank says it's mulling three ways mortgage loans to residential property investors could be defined as it works to establish a new asset class for such lending within trading banks' capital adequacy requirements.

The move is partly to facilitate the introduction of a macro-prudential property investor policy should that become necessary, the Reserve Bank says.

The three possible alternatives under consideration include:

· if the mortgaged property is not owner-occupied; or

· if servicing of the mortgage loan is primarily reliant on rental income (with the threshold likely to be 50%); or

· if servicing of the mortgage loan is at all reliant on rental income.

The potential is that the Reserve Bank move could make loans more expensive for property investors, and potentially harder for them to obtain, given banks will have to hold more capital against such lending than they currently do. The latest monthly Reserve Bank data shows investors accounted for $1.146 billion, or 32%, of new residential mortgage lending in January.

The Reserve Bank says it wants to establish a new asset sub-class within the existing retail asset class rather than categorising loans to residential property investors as corporate loans. Given New Zealand's numerous property investors, many with small portfolios, there's justification to keep property investment loans within the retail asset class, the Reserve Bank argues.

The new asset class for residential property investors is likely to be introduced from July, the Reserve Bank says, and be phased in over nine months.

In its consultation paper the Reserve Bank says evidence from Ireland, Britain and Fitch shows loans to property investors have a higher default rate than loans to home owner-occupiers in housing market downturns.

"International evidence suggests that default rates and loss rates experienced during sharp housing market downturns, tend to be higher for residential property investment loans than for loans to owner-occupiers," Reserve Bank head of prudential supervision Toby Fiennes says.

“The proposal would bring the Reserve Bank’s framework more into line with the international Basel standards for bank capital. The proposed rule amendment is designed to ensure that banks hold adequate capital for the risks that they face from investment property lending.”

The Reserve Bank says consultation with banks will close on April 7 and says it's seeking views on how to best define a property investment loan.

"Once the Reserve Bank has settled upon a definition, it proposes to amend existing rules by requiring all locally incorporated banks to include residential property investment mortgage loans in a specific asset sub-class, and hold appropriate regulatory capital for those loans," Fiennes says.

Including all locally incorporated banks is a change from the Reserve Bank's previously thinking as it had been considering making just the big four banks treat loans to residential property investors differently to loans to home owner occupiers.

"This means that all locally incorporated banks would have to group loans to residential property investors in a separate and new asset class," the Reserve Bank says.

The Reserve Bank previously looked at an option that would've seen loans to borrowers with five or more residential properties classified as loans to residential property investors. Then late last year Reserve Bank Deputy Governor Grant Spencer said the central bank was looking at how to categorise a borrower as a residential property investor, saying this could be based on the proportion of their total income that's coming from their investment portfolio, rather than just the number of houses they own.

"While the current proposal is not a macro-prudential policy proposal, creating consistent asset class groupings to be used by all banks would help the Reserve Bank to implement targeted macro-prudential policies in the future, should that become necessary," says Fiennes.

Here's a Reserve Bank Q&A on its plans for property investors' loans.

And see more on the background to this vexed issue from David Hargreaves here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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29 Comments

Yuss!! It's a start, at least.

Looks like this action will be a bonanza for second tier lenders the costs of which will push up rents and create yet more shortages.
The RB is firmly on the side of investors so all is well.
All together now- three cheers for Wheeler, the speculators friend.
Brilliant.

I love the way you paint a positive picture for landlords when their overheads are looking likely to rise.
 
So you're saying that higher interest rates will actually help property investors. 
Hmmm... that's an intersting take but it sounds like complete bs.
 
In addition your 'alter ego' said today in an interview their will be tears for over leveraged property investors.  Sounds a bit bipolar BigDaddy.  Might be time you flagged the next auction and instead visited your GP.

A case here for ignoring the specious argument that higher borrowing costs mean higher rent.
Medium term higher borrowing cost reduces the price both landlords and unaffected occupier borrowers pay because investors are prepared to pay less when rent escalation is limited by the renters income.
The final result is that as prices fall overall and the percentage of investors will fall as they need both income and capital gain to justify current prices.
Good luck ,landlords, you may need it.

Oh no ............more intervention in the ONLY truly free market in NZ !
Clearly the LTVR  rules have had no effect whatsoever , and can be consigned to the dirt-bin where they belong
When will the RBNZ realsie that the drivers of the  Auckland housing problem are way outside their locus of influence or control .

Well if that is what the free market is, then it is a dog and needs a big choke chain on it. 

So its a free market and a mess, great example of a free market then.
LVR would seem to have a considerable effect on the FHB and hence risk.
 

I've been classified as a small business for years. I find dealing with the bank as a business customer vastly superior to when I was a personal customer. I get competitive interest rates and have been told there will be no change... besides, loans are locked in until next decade. The bank likes me because I pay their wages, am easy to deal with.. don't pay too much for property and ultimately pay retired people income on their TD's. This is a non event.

After reading the consultation paper...it appears that the risk weightings for property investors will increase from 30% (approx) to between 40-100%....that will defnitely change the bank's attitude towards investors...

Already at between 40-100% based on LVR and/or insurance considerations.
PI would just be another factor that is weighed into it. At present, ave risk weight sits at around 40% for residential lending.
So a loan for investment property may go from say 40% (assume 20% equity, and insurance), to say 45% if classed as this new asset class 'investment property'.
I say 'may' because they will have fun actually quantifying the increased risk to PI's.
a) Current NZ data will show loans to PI's are just as safe if not safer, as we have not had a significant property crash in NZ recent history, and overseas data only shows increased risks for PI's during significant downturns (obviously, as they are more exposed, or in Irelands case, overbuilt so most of their property was sitting empty while it lost value).
b)The examples cited in the paper that show higher default rates to PI's during a market crash, also show LOWER default rates during 'business as usual' periods.  Stats people will proportion these different rates to the relevant corresponding periods of time (i.e crash period covering 10% of time, normal 90% for example), and will likely arrive at the conclusion that over all loans to PI's are just as safe if not safer.

Simon...you are wrong, the current risk weighting is 30% approx (refer to the consultation document, item 10, page 4)....and the RBNZ is proposing to increase this weighting for PI's to well above current settings....our current debt levels are higher than Greece, so it's probably worth implementing some safeguard measures, right?

Approx 30% is average across all residential lending, each loan given own weight depending on factors such as lvr, mortgage insurance.

'..rbnz propose to increase this weighting for PIs to well above current settings...'

Giant leap and you're own interpretation.

They are only classifying at the stage. likely an increase in risk weight for PI loans. Unlikely that will be 'well above' non PI residential lending.

And Wheeler intends to implement this year...

This is whats going to happen.
This classification will be used to either:
a) remove LVR for non-PI loans, maintaining it for PI loans; or
b) increase LVR to 25-30% deposit required for future loans for investment property.
The increased 'risk weights' won't be seen as increased interest rates by banks as the volume of loans for PI's will be reduced by a and b above so that banks will have capital to burn and be keen to lend to any PI with sufficient equity.

Simon...the RBNZ wants to tighten the criteria for new lending, your option a) is an actual loosening...also, the risk weights will either result in higher interest rates, higher LVR's or both for PI's.

So RBNZ moves to tighten criteria for new lending at a time when banks are flush with money to lend but not enough borrowers,    And at a time when increasing number of houses/property are being sold to buyers with access to foreign money and no need to borrow from NZ based banks.   
Shrinking volume from both ends. 
Wont this affect the financial stability of ?NZ?   The very thing RBNZ is charged with. 

You read things then take leaps to draw your own conclusions and assert these as fact.

Does rbnz 'want to tighten the criteria for new lending'?

It's almost like a government conspiracy in conjunction with the RBNZ to make it even easier for offshore foreign investors with their foreign cash and offshore sourced loans at 3% to have a field day purchasing here while the locals investors are screwed over. Wheeler hasn't got a clue! 

Bingo! That's exactly how I see it and the other changes that have been made to date.  First cut out the FHBs with LVR restrictions, now the Kiwi investor who has equity but relies on rental income for servicing.
What's the next macro toll they'll use? "Only non residents can buy as they are not speculators like the kiwi investor, they are bringing much needed capital into the country and want to add value to our country."
Too blunt?  RBNZ would find a way to policy word it differently I'm sure

Mortgage grantors might want to calculate their borrowing costs at 5% over current rates. 2% for legislatively condoned gouging, and 3% for a return to realistic free market pricing of risk. Its coming, the writing is is on all the wall, etc, etc. The people who really need these warnings are the ones who will mostly strongly reject them.

You mean 5% as a percentage of an increase not as an absolute I take it?
I.e from 5.5% to 5.75% if loan is for PI.  Not really a game changer, but considering a lot of PIs already get heavily dicounted rates below carded or what the average owner occupier gets, then might end up leveling the playing field, so fair enough I guess

The risks are only arguably higher for PI's. Quantify that increased risk and have capital requirements proportionally higher for lending to PI's and you'll see bugger all increase in interest rates.
The 'reliance on rental income' thing seems a lot like wealthy high income earners getting their way, which I do not agree with at all.  It is basically saying that income from a very high salary is lower risk than the same income from several rental properties.  This point I strongly disagree with.  Very high salaries are often transient and people lose there jobs (i.e this income goes to Zero) more often than a PI would lose all their tennants at the same time.
 
The higher risks for PI's come from stretching LVR's over many properties during up cycles, coupled with negative gearing so they bet on capital gains continuing, then ANY decline in values can put them in a default, or cut losses, situation. Banks already recognise this by wanting more deposit for investment properties.
 
 

If I was in charge of financial stability I would take a completey different approach....
 
I would accept that business is the ultimate work-horse in the economy.....so any threats to business would be my focus when considering financial stability.
 
My 3 alternatives for consideration would be:
 
If the mortgaged property is not owned by someone in business or their employees
If servicing the mortgage loan is primarily reliant on any State income (whether from wages/salaries/goods/services/other....
If servicing the mortgage is at all reliant on any payments you receive from the State.
 
Now you can see that I have pigeon holed one of the largest costs and threats to all business......The group who work for the State or receive anything at all from the State are unproductive so therefore any mortgages they hold threaten financial stability so this group should have to pay more expensive loans.
 
 

"The group who work for the State or receive anything at all from the State are unproductive"
Not strictly true, for instance a public health service is less of a burden on a counrty's  GDP than a private service and gives a better result overall.  A a result the 50% saving of GDP is used in a less rentier fashion, ergo it should be better for the economy. 
Education is a bit more arguable on that score in that for a significant increase in cost there is probably a btter outcome.  But still the only way most ppl can afford to have their children educated. now if we decided to increase funding of public education by say 20% its probable it would match what a private school achieves.
The rest of it is spoken as a true "free marketeer" so you base your economic policy on pure belief, kind of dodgy to my mind.
glad you are indeed a non-event in some quiet part of NZ.
 
 
 
 

It depends on what you consider a business and whether all business is equal.
You could define and split businesses too, such as manufacturing and exporting being more valuable (bringing in direct income) than a service business that relies on other economic activity happening and doing well first.

I agree you could split business up......I was feeling somewhat generous at the time of my posting so lumped all business types together.......and I like to leave a little bit of head-room just in case some undesirable situation should arise.

except to gubbermint the service business are more valuable since they employ more subjects, and the market is deeper.  They can respend into each other creating much more economic depth.   

manufacturing and exporting are hard work, as they need real value, real resources, real markets.  The production can be screwed down as a commodity, and a service business perched on top raking in the cash.  Like they did with Electrocorp, like Fonterra vs Fonterra coop.  that's the model they use.   production is grass roots commodity, not the real business.  "Real business" is the value added useless stuff that is cost added to the top...like SPOT when all you wanted was a cheap working phone

"I would accept that business is the ultimate work-horse in the economy.....so any threats to business would be my focus when considering financial stability."

That's what National are doing and that's what they've always done.

Except NZ farmers and small NZ processors/business aren't the "businesses" they care about.  Those SOHO/medium sized businesses are just "hobbyists" now.
They want to support REAL businesses - big corporate and multi-nationals and that's why the small guys are being moved out of the way.

Yep, the big guys fund the party expecteing returns, the little guys, na.