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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