ANZ CEO David Hisco and The Co-operative Bank CEO Bruce McLachlan say the RBNZ should hit residential property investors harder than it's proposing to

ANZ CEO David Hisco and The Co-operative Bank CEO Bruce McLachlan say the RBNZ should hit residential property investors harder than it's proposing to

By Gareth Vaughan

At least two of the country's bank bosses think the Reserve Bank should make it even harder for them to lend to residential property investors than it's proposing to do through tougher restrictions on high loan-to-value ratio (LVR) residential mortgage lending.

Both ANZ NZ CEO David Hisco and The Co-operative Bank CEO Bruce McLachlan argue the Reserve Bank should be taking a tougher line. Hisco suggests a minimum deposit for residential property investors borrowing from banks of 60% rather than the 40% proposed by the Reserve Bank. And McLachlan suggests limits to high debt-to-income ratio lending would hit property investors harder than high-LVR restrictions.

Nonetheless McLachlan told interest.co.nz the Reserve Bank's move, announced on Tuesday morning, is appropriate and long overdue.

"I think while supply has been a factor in house price escalation, speculation has been a much bigger part of it than what most people have been prepared to admit. So I've never believed waiting for the supply to be fixed was the right answer," McLachlan said.

"The other thing is I was shocked in March when the Reserve Bank dropped the OCR, not because they shouldn't drop the OCR, but because at the time we could see property prices were going ballistic across the whole of New Zealand and they threw a whole lot of petrol on the fire without doing anything else."

The Reserve Bank is proposing that, from September 1, no more than 5% of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60% (i.e. a deposit of less than 40%), and no more than 10% of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80% (i.e. a deposit of less than 20%). The Reserve Bank has called for submissions by August 10.

Currently, Auckland rental property investors are limited to a 70% LVR and there is a 5% speed limit on any lending above 70%. The change effectively tightens lending to investors across New Zealand and increases the size of minimum deposit required. The speed limit for banks lending to non-Auckland owner-occupiers borrowing more than 80% is currently 15% whilst it's 10% in Auckland.

'Take investors out of the market' 

McLachlan said he had thought the Reserve Bank might take the deposit required by property investors higher than 40%. His view echoes that of Hisco. Hisco says the Reserve Bank "should go harder and ask for 60% [deposits]."

"Almost half of house sales in Auckland are to property investors. Taking them out of the market will be unpopular amongst investors but it may end up doing them a favour. Of course this would mean less business for us banks but right now the solution calls for everyone to adjust," Hisco writes.

"Salaries and wages have hardly changed whilst house prices have risen - this can't continue so it's a matter of when, not if, the market adjusts," Hisco adds."Property markets can and do go backwards." 

Hisco also calls for the Reserve Bank to try harder to weaken the New Zealand dollar to help exporters and boost tourism.

More impact seen than last time

When the Reserve Bank last year introduced a 30% deposit requirement for Auckland property investors borrowing from banks McLachlan told interest.co.nz it was over estimating the impact this move would have. McLachlan said through their use of security in other assets, property investors could quite easily still do what they wanted to do and borrow what they needed at a 69% LVR as opposed to a 75% LVR.

"I think 40% is likely to have more impact. There is a lot of equity out there though so there's no doubt if you wanted to hit investors debt-to-income [ratio limits] is certainly the way to go rather than LVRs, unless you make the LVRs really tough," McLachlan said.

 He said 80% of The Co-operative Bank's investor loans are done at LVRs over 60%.

"That doesn't mean 80% of the business is now going to go. Investors choose to arrange their affairs so that they only put up as much security as they need to. And obviously they like gearing up investment properties because they get the deduction for the interest," said McLachlan.

"So I think it's wrong to read into it 'oh it's going to slow our investor lending down by 80%'. No it won't, but there will be 80% of our lending that going forward would have to be structured in a different way or not proceed. So I think in that sense it is certainly going to have way more impact than a move to a 30% deposit in Auckland."

How investors have been able to game the system

In its consultation paper on the proposed changes, the Reserve Bank acknowledges after last year's introduction of the Auckland investor limit, there has been a material decline in average LVRs without any significant reduction in Auckland investor purchases.

"This suggests that many affected investors have been able to continue transacting at a lower LVR by:
a. leveraging owner-occupied or non-Auckland investment properties using the combined collateral exemption,
b. leveraging property that was previously held outside of the collateral pool,
c. shifting to purchasing lower value property, eg an apartment rather than a standalone house,
d. more actively revaluing existing properties, especially in an environment of rapid house price increases."

"Alternatively, different investors with more equity may have replaced those constrained by the LVR rules. The Reserve Bank estimates that, of the total amount of 70% to 80% LVR lending that might have otherwise occurred in the absence of the policy, around 50% to 66% has continued to transact either by making use of the combined collateral exemption or shifting to an LVR of just below 70[%]," the Reserve Bank says.

It goes on to say treatment of bank customers with multiple collateral types is an important complexity for the LVR regime.

"In 2015, RBNZ considered approaches to limit the incentives of investors to split lending across multiple banks in order to increase borrowing capacity. The RBNZ initially considered approaches that involved splitting loans (with multiple different types of collateral) across multiple speed limit categories, but finally settled on an approach where Auckland investors were placed entirely in one speed limit category with an exemption available for combined collateral."

The prudential regulator is now proposing that the combined collateral exemption will be redrafted so that it reflects the new LVR limits.

"We have generalised the drafting of the exemption so that it should not need to be redrafted if there are any further changes to the LVR policy in the future. In the proposed policy, it will effectively allow investor-borrowers who have their own home as part of the collateral package to borrow 80% against their own home and 60% against investment property. This greatly reduces the incentive to ‘split-bank’ in order to borrow more, which would have been an inefficiency of the proposed policy if this exemption was not included," the Reserve Bank says.

McLachlan said closing the exemption for people with investments outside Auckland should have a "material" impact.

I'm pretty confident this [Reserve Bank move] is going to slow the market quite quickly," added McLachlan, noting the third iteration of Reserve Bank high-LVR restrictions feels like it will have "a bit more of a permanence around it" in terms of impact, than the first and second iterations.

'September 1 is incredibly close'

Meanwhile, McLachlan said the actual changes proposed to the rules around high-LVR residential mortgage lending should not be difficult for banks to implement.

"The only thing I am a little bit surprised about is that we weren't given one more month before they came into effect just because of our pipeline. September 1 is incredibly close and we've obviously been through and already seen all of our committed settlements that are happening after that date, and we do have quite a few and they're going to have to comply with the new rules."

"We immediately have taken action to ensure we comply with the spirit of them [the incoming rules] from now, but we can't and wouldn't want to change what's in our pipeline...Certainly the one thing we would challenge would be the implementation date and probably one month would make quite a difference for us," said McLachlan.

Additionally he said dropping the limit for bank lending to owner-occupiers outside Auckland permitted with an LVR of greater than 80% from 15% to 10%, will have an impact.

"We see that this is going to tighten up a little bit more in the owner-occupier over 80% [LVR lending]," said McLachlan.

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33 Comments

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Agree Gareth V. If not for rest of NZ, Should do it in Auckland - say 50% if not 60% in Auckland and rest of NZ let it be 40% or whole of NZ 60%.

Still will not be that hit as many investors are sitting on very high equity.

Alternatively can introduce that one equity cannot be used again other, need hard deposit for each individual property and also look at interest only loan besides introducing on priority that has already been decided Loan to Income like UK.

"need hard deposit for each individual property"
not sure that is possible to enforce, could you just not take the cash released from your loan to another bank so would have loans at different banks for each property,

Disclosure between banks? Not the amount of the loan or any details, just the existence of a loan, then they can request the borrower supply details.

Wouldn't be that hard to keep a track of it.

But it is a pretty important thing I think, investors that can leverage won't be hit. If you need 40% cash in hand, then it does make an impact. Any investor who got in to the market more than say 2 years ago won't struggle to keep investing as their property value is way up.

How would you transfer it ST? In a bag as hard cash? bringing more questions from the likes of IRD and NZ police maybe?

internet bank transfer it would be surely, thus both banks know where it was and where it went.

exactly if you were inclined to try to rort it would you not take out in cash or then there is good old sky city to wash it through.
I think there are those out there that will as soon as you bring any rule in will try to work around it as per below comment yesterday on different site
i think we are a bit niave in NZ in the levels that things are happening to "bend" our laws and rules to make money and not pay tax or hide from the authorities what they are doing

"How does bank/government makes sure the next house is owner occupied?
The new LVR makes investment property to have 40% deposit, but if I purchase the next house to live in, then it's 20% deposit, this has been verified by my mortgage manager.
My questions are:
1. how does the bank/government know that I live there? via utility bills?
2. what happens if I move out after a period of time? eg. 1 month, 6 months, 1 year? "

Unless your'e a FHB, they would know you had other property. Even if you applied as a FHB, then rented it out....you still have to live somewhere.
If you decided to rent it out later, then regular income will have to show in your account as coming from somewhere.
Most banks would query it. IRD most certainly will.
Ive actually had dodgy landlords in the UK trying the old utility bill trick by keeping all the bills for the property in their name and renting out the rooms. I actually dobbed them in as I recall. We were getting kicked out anyway cause they continually insisted on just turning up when they felt like it, even in the middle of the night to sleep it off in the loft after getting on the turps, no knocking the door etc

They got done big time.

Banks do talk to each other quite a bit. If you took out loan under false pretenses then they will act

Almost forgot, There is of course your credit history ST. It can be quite detailed and needs to be for banks to even loan you a buck.

answer to the question, again it is a different NZ now, its all about me and how can i get rich

I asked my mortgage broker about this and they think it's unlikely that a bank would make you increase equity from 20% to 40% if you move out. Maybe banks will start putting clauses in the mortgage agreements that state that you have to inform them if usage changes, and maybe you would have to increase equity - all just speculation though.

It would also invalidate your personal insurance on the property ST. The insurer would definitely want to know about the change in circumstances.

I think Banks nowadays can get comprehensive credit reports detailing all the borrowings one has from different lenders...May even cover trusts where one has effective control.

They will find they will have to do this anyway, cause what they have done will only solve a fraction of the problem without serious government intervention of some kind anyway. That's going to be the next election 'elephant in the room' along with the ridiculous migration/immigration numbers

No need to panic. If prices drop, Wheeler will be forced to cut the OCR further. These LVR limits will quickly be removed too. What kind of dispicable person would hope for a property crash? Why aren't all these pundits pushing for wage increases or lower taxes instead of punishing savvy investors? Come one Bernard Hickey, write an article about how little wages have increased in the last 30 years.

NZ's OCR doesn't have as far to drop as you might think. We are not like the US or Europe or Japan where we can hit zero, unless we don't mind an exchange rate at 30 cents.

If prices are falling I think you'll find the RBNZ won't be in a hurry to increase the amount of leverage available.

Australia has done the whole higher wages thing and it all went back into leverage for housing. Now Australia is completely uncompetitive.

Yes Zombie, you are correct. NZ and Australia always need a higher cash rate than Japan or the U.S. Most people don't realize that property speculation couldn't exist without it. The banks would crumble and risk premiums would go up.

Those despicable people are those renters whose only hope of owning one small house is if property prices come down. Surely you must be able to understand that?

nonsense, there are many cheap houses in NZ, those people you refer to are the 'inactive' wait and see types...

Debt to income ratio limits across the board, companies and trusts get their income risk-adjusted down...
With foreign resident buyers risk-adjusted income limited to apartments

Coupled with LVR restrictions and tougher regulation of valuers responsible for the 'V' in LVR's as there is a direct conflict of interest there - being paid by the people you are doing the valuation for, naturally you want to give them a high valuation - especially for investors looking for 'equity' to draw upon

Using a debt to income ratio across the board limits lending and even if you have equity you cannot release it unless you meet tougher income (UMI) requirements

Perhaps these two should show some leadership and impose that without the RBNZ doing so if that is what they feel.

Doesn't anyone find it hugely ironic that Bank CEOs are decrying a bubble, CEOs of the very same money lenders who have been stoking the flames with all sorts of lending incentives.

Yes I do, but most people and the media don't want to confront it.

Yes I find it bizarre that a CEO publicly trashes his own customers forgetting his business was involved in what has taken place up until now. It seems ANZ is a bank that no longer wants to be a bank.

dp

I reckon in a few years time we will be looking back at the unexpected and unwanted consequences of this intervention. e.g.

- Less building activity impacting long term supply (caused by reduced investor demand for existing houses)

- Market distortions as people use loopholes to get around the restrictions - e.g. greater demand for houses with minor dwelling as a way to fund investment property as 'owner occupied - live in the granny flat, rent out the big house or vice versa'

The easy solution is for the government to change tax rules to make interest not deductible. That alone would adjust out the gearing advantage.
For a landlord with 100% equity there should be no problem and he/she would be unaffected by the change.
At the very least the signal of a change to such a move within say one year would cause most investors to decide whether they were able to get a return.

Removal of interest expensing would help level the playing field between investors and owner-occupiers. However making only new builds tax deductible (for investors and owner-occupiers) should serve to incentivise supply.

Why not?

I like the carrot approach and agree only deductible for new builds, it would be a much easier sell to the voting public. as for increasing supply not sure on that, not many rental investors buy new build houses

Am thinking investors might build more, if that is where the incentive goes.

Yes an easier sell to the electorate as it seems more equitable (between investors and owner-occupiers) than a blanket ban on interest deductibility.

And then what will happen to rents (up) and the condition of the houses (down) as investors run out of money to service them?

With more FHBs able to buy because of more equal tax treatment with investors, less demand on rental sector, less upward pressure on rents.

Removal of interest expensing does not impact expensing of maintenance costs.

dp.

Finally, RBNZ unashamedly utilising prudential policy to support monetary policy.

Why has it taken so long?

Must get the lasso and go look for the horses that bolted ....

The RBNZ could always increase the risk weighting of mortgage lending to reflect the increased risk of mortgage lending. Though this would require banks to hold more capital it would require them to price for risk.

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