By David Hargreaves
Hands up all of those among you who own two houses.
No, not five houses, not four, not three, just two. One to live in, and one for an income and then to sell for your retirement. Hands up.
Now, you at the back with your hand up indicating you own two houses, do you regard yourself as a "property investor"? No? Well, you are you know. The Reserve Bank says so.
Yes, I'm referring to the - I think - extraordinary reversal by our central bank of its original plans to get the banks to hold more capital against mortgages held by those owning more than five properties (actually was originally four), something that I thought was a pretty good idea.
I'm very surprised that the new proposals now being put forward by the RBNZ, and which appear to have the backing of the big banks (meaning that the proposals will be implemented) do not seem to have caused more concern than they have among what I will term "accidental property investors". Maybe many people have not yet realised they will be caught by the new rules.
Fundamental part of NZ
Rightly or wrongly it is a fundamental part of the New Zealand psyche that someone wants to own their own home and, having achieved that, then wants to buy a second one as a source of some extra ongoing income and to use as a retirement nest egg by selling it much later for a chunky capital gain.
I'm sure these people don't call themselves property investors. But, courtesy of the RBNZ, that's how they will now be characterised.
The difference in monetary terms for the "accidental property investors" under the new rules is likely to be barely noticeable initially, which is presumably why there has been little public outcry.
Estimates of how much the new measures might add to the cost of a mortgage for one of these "investors" suggest it might be only about a quarter of a percentage point, which isn't too much of a swift kick in the wallet.
A tagging exercise
But what this work by the RBNZ has really metamorphosed into is a tagging exercise. "We know where you live and we know where you own."
With loans to identified property investors now set to occupy a new category in the banks' books, the RBNZ will in future be able to directly target those people involved.
The key sentence in all the bumph put out by the RBNZ last week was: "The current proposal is not a macro-prudential policy proposal, but having consistent asset class groupings used by all banks would help the Reserve Bank to implement targeted macro-prudential policies in future should that become necessary." The bold type is mine.
ANZ's economists have suggested that the new measures could have "more teeth" than the RBNZ's 'speed limits' on high loan to value lending, introduced in 2013.
550,000 houses
The economists reckon the changes would see up to 35% of the private dwelling stock potentially susceptible to the proposed changes. "This is around 550,000 dwellings," they said.
Now, that's a lot of dwellings.
I think the large numbers of people who will suddenly find themselves caught by these new proposals should not so much fear what is currently proposed (what is quarter of a percentage point of interest among friends anyway?) - but where it actually leads us. The potential would exist within these new proposals for the RBNZ to apply fairly draconian costs to banks (and therefore to customers) through targeted macro-prudential policy.
Personally I don't have a problem at all with the central bank having such a loaded gun. I just think that these new proposals give the RBNZ a shooting range that's far too wide.
The original proposals were, I think, very sound, but as I opined recently, those proposals were clearly very strongly resisted by the big banks.
Higher bar would have been good
I think that setting a bar at four or five properties and then having bank customers with mortgages on that many properties treated as commercial clients - therefore being charged quite a bit more - would have been very sensible both from a financial stability perspective and with a view to calming the housing market a little.
But, of course, if the banks had to treat such property investors as effectively business customers they would miss out on the risk-discounting benefit that they get through residential mortgages. Essentially business loans carry much more risk, therefore banks have to hold much more capital against them, and it costs them.
So, it appears to me the big banks have completely stymied the RBNZ (bearing in mind that the original proposals came out as long ago as September 2013).
The result is that a policy that was intended as a very targeted and potentially quite stringent one against a relatively small group of people has metamorphosed into a hugely watered-down but scatter-gun policy covering a wide section of the population.
A defeat
The RBNZ has been defeated, but has given itself some comfort with a potential 'out clause' - the ability to maybe bring something quite strong and nasty in through macro-prudential policy later, should the housing market really seem to be getting out of control.
But the interesting thing is, that by having such a large potential target, I think the RBNZ is potentially putting itself in a position where, if it is not careful, it could actually pre-empt that which it seeks to avoid - a sharp fall in house prices.
I've never bought into the argument that the booming Auckland house market is all about lack of supply.
The official figures tell us that about 30% of new mortgage lending every month is going to people buying houses as an investment - not to live in. Now, that tells you there is a demand issue. People with money to invest want to buy houses. That's nothing to do with supply.
The danger to particularly the Auckland housing market would be if that investment demand completely disappears - as it certainly could do with an international shock.
But what about a domestic shock? What about an RBNZ macro-prudential policy that is too broadly applied, that gets our two-home owners? If you suddenly take away 30% of the house buyers what would that do to prices? I don't think we would be talking about a "soft landing".
The RBNZ will really have to be very careful about what it wishes for.
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