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.