sign up log in
Want to go ad-free? Find out how, here.

David Hargreaves believes the RBNZ has spread the net too widely with its new housing investment proposals

David Hargreaves believes the RBNZ has spread the net too widely with its new housing investment proposals
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

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.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

35 Comments

This idiocy could become an administrative nighmare to police , and , apart from being utterly stupid , is utterly confusing .

Without a regsiter of owners (that would enable us  understand who lives in China and owns property here ) how do they even know who owns what ?

For example :-

We  only own our home ( in a trust ) and we dont have a mortgage on our home , but I also own shares in a Company which owns a commercial buildling with shops and offices upstairs . The upstairs portion was always offices , but there is also a small residential flat area .

There is a small mortgage on the commerical buliding  raised last year to make in earthquake safe .

The same Company also has shares in a property syndication , and shares in two NZX  listed property companies .

Those shares were bought using debt with the commercial building as security ,  over a decade ago .

Am I now an Investor facing penalty interest on that small mortgage ?

You simply cannot change the rules during the game .

Up
0

Yes.

Up
0

Boatman.....the Trust will be considered to be the owner not yourself.......so techinically you are not an owner/occupier......and it is probably yes to your question.

Up
0

On re -reading the article I see .........." Its got the support of Banks"  ............ of course it would , its more margin income for Banks .

Its a no brainer that banks have a vested interest in higher rates of interest .

 

 

Up
0

Sorry, I have not followed the details of this one very closely. But do we know for sure that the banks will fund this requirement for additional capital specifically from a higher mortgage rate to these second/third houses? Or could they just reduce the term deposit rates so a cross subsidy would occur?

Up
0

Off course they are property investors.  They didn't buy the property for any other reason but to save and make money for their retirement.  No different from investment in shares or any other instrument for the same purpose.  A bit like the analogy of only being a little bit pregnant.  You either are or you aren't.  Any way I thought that this would only affect people if they had highly leaveraged investments.  They have equity available in their home.  If they have maxed out the leverage on both properties, is this wise, dicouraging this may be in everybodies interest.

Where does the holiday batch fit.  On the otherhand anybody who has a highly geared purchase of a batch has rocks in their head, so does it really matter.

Up
0

By definition, "One to live in, and one for an income and then to sell for your retirement.", as it would be for any asset class, this is investment. Or speculation dependent on your approach and strategy. The number is irrelevant, watch as the rush to 1 higher priced property from many lower priced ones occurs if this was allowed an exemption. Maybe a few casually held vacant holiday homes and city crashpads for the kids at uni will get caught up in this, but if you have that sort of means I cannot see that this will prevent the practice and may not be affected as they are freehold.

You may be right about the "tagging", but we keep records of many things and to know so very little about property ownership for reporting purposes is, frankly, a ridiculous gap in knowledge given the importance it commands to the economy as a whole.

Up
0

This article smacks of the greedy, selfish attitude that got us into this mess in the first place. Is it every person's right to have a house on the side? This seems to be where we are going as ownership rate is 60% in AKL. Property investor? Me? No, I only have 4 houses.

Up
0

Of course they are not "accidental" investors.

They make a deliberate investment decision....often by not selling when they move.

 

Here's a radical thought for those with 1 rental.

Keep most of your mortgage debt on your own home, and then you will not be affected much at all.

But no, they follow the accountants advise and load up the debt on the rental instead....simply to claim the tax deductions.

 

News flash....you can't have it both ways.

Time to pay the Piper.

Up
0

Yes, you can have it both ways, both properties in your own name, residential home is put up for security, and loan is used for the investment property. Its the use that the money is put to, not the security for tax purposes, but for RBNZ purposes it is the security not the purpose that matters. 

Up
0

So they want to protect the Banks ?

Bollocks !

The banks know and understand the risks inherent in lending against property for investment , and dont need protection , just any any other business does not need Govt intervention when doing its ordinary legal business

No one held a gun to the head of anyone at ANZ Bank  when I raised a mortgage on my commercial property .

ANZ did not need the RBNZ to tell them the risks of lending me $1 , and they took every precaution including regsitration on the title deeds of their interest , getting a PG from me , and taking covering security over an NZX  share portfolio and other investments .

So there you have it .

My concern is the changing the rules of the game DURING the game .

 

Up
0

I hope John Key has applied his mind to this issue .

Clearly we dont want any Kiwis investing in residential property at all  .

We have gotten rid of young Kiwi families who dont have the 20% deposit , so they are not in the game .

Auctions are still swamped with Asain buyers  fighting for limited stock .

Now we are going to remove all the rest of the Kiwis from the game by penalising them financially .

Its a Chinese - only game after that

 I want to know who is going to provide hosuing rental stock if investors have been told they are not part of the housing mix of the future ?

Will Housing New Zealand give my 3 children a house each when they need one  ?

I doubt it

Up
0

He hasn't because it is not an issue to him  There is complete denial from the National party that there is any problem with the level of immigration or the auctions being swamped.

The latest question time from parliment almost gives one the impression he almost thinks its something to joke about instead of seriously addressing.  Why anybody ever aspiring to own a home voted for this clown is beyond me.

 

Up
0

So the RBNZ wants to encourage people to outbid each other with cheap money for a house to live in as they are a better risk (target? banker host tribe?) than those who own a house for profit? Have they gone mad? This sounds like a similar case to Steve Keen's "first home vendors boost", perhaps it should be called "special opportunity for Auckland property investors to unload their overpriced housing stock on unsuspecting first home buyers policy".

 

The RBNZ should either put interest rates up to their best estimate of the natural rate or shut up. They are the ones goosing demand.

Up
0

yes, because before owning your second house, it is best to stop paying [more expensive] rent to someone else.

Up
0

Yes, but what if the rent is half the cost of ownership? Seems to me we are in a pretty messed up place with house prices and the RBNZ is feeding the monster, just like 2003-2007 when they thought they knew what they were doing.

Up
0

This article is struggling to make it's point.

If you own a single house, extra to where you live, and rent it for all the good reasons people do that - you are a property investor. Simple. So you are a 'small' investor.  It doesn't make you not an investor.

Actually - there are lot of people who would love to have that single extra house.  They would think of you with the single house as big time.

Up
0

It has to be all or nothing

 

Yes the Bankers Association was energetic in its opposition to the original 4+ plan and then the 5+ plan for fairly obvious reasons - the cost of being the policeman in this modern age of (say) a family of 4. ie, 2 adults and 2 children who own 8 properties and 4 have trust entities, they own 4 of the properties individually, 1 in each name, and 1 in each of the 4 trusts. All 8 properties are mortgaged, spread across 4 main banks and 4 other lending institutions. A seperate lender for each mortgage.

 

In the absence of a single national property and mortgage register that was never going to work

Go and examine the new tests for determining an investment property - Not sure that will work either

Trusts cant reside in and occupy a residence - is the RBNZ prepared to look-through trusts?

 

And the banks know it.

The only people that will get hurt will be the honest people and first timers

 

Try again. If at first you don't succeed, try, try again

Shows how out of touch from the man-in-the-street the RBNZ is

And meanwhile the Government smiles as it watches the RBNZ twist in the wind

 

How long has the RBNZ being cooking this up?

Up
0

We do have a single mortgage register, if your mortgage is not registeres then it has no priority should someone register a mortgage on the title.

Up
0

Where is it? Is it in the public domain? Can anyone see it?

Up
0

Property investors can do what they like to the commercial market, but hands off residential - given the current environment.

Not only is it “fundamental part of the New Zealand psyche that someone wants to own their own home” but also a necessity to be able to own affordable "roof over ones head", one that doesn’t take the majority of a person’s/families income.

RBNZ need to target Auckland property investors owning more than one residential house, combined they have significantly added to the shortage and unaffordable house issue.

A sharp fall in residential housing would be ideal and in direct contrast to what property investors have been benefiting from in the last one, two + decades, It would be fair to say they’ve have a pretty sweet run.

Unfortunately the Bank continues to loan more and more money as we compete for the same properties; with the bulk of the interest going overseas (to buy land which is in NZ? Unsustainable)

One feels sorry for those who have been sucked in by Agents, Media, Bank hype and over committed, but it’s far more important to bring cost of housing back into line with what our local economy actually afford.

We didn’t learn from the GFC, lowering interest rates will only exasperate the issue further, other tools must be implemented.

People who've got more than enough need to make a sacrifice for the future of genrations - they can afford it (how many houses, cars etc. does one really need)

This whole greed thing is self indulgent - gratifying and detrimental to NZ socioty creating economic inequality and underlying resentment.

Up
0

Bravo!

Up
0

OK either it was watered down in committee (deliberately) or it was overgenerialised (in committee and became ineffective - is there any way to find out just who is pulling this crap.

The higher rates on four or five properties is not revenue gouging nor a social/inflation tool.
It targets the robust (but often highly leveraged) large property investor who can routinely use existing security as deposits, and thus encourages them to move to higher revenue buildings rather than grabbags worth of smaller holdings.   
 In one simple swoop it gives a reason to disposal of cheap or average properties , creating an increase in supply, while encouraging selling in the low end market without damaging demand in the high end.
 So cases like "one house in Remuera vs 4 somewhere else" come out a lot more even for the larger investors, while encouraging the sale of those 4 properties to 2-4 new investors.

spreading the net wider just defeats that purpose and is either just more revenue grabbing, or is a "poison pill" to try and get the idea killed at it's next reading.  Neither scenairo helps NZ or NZers.

As for 2 houses? well selection bias on this website. If you have an investment portfolio there should be some proprty in it - even it's just your own home.  Many people can't afford one - partly due to the ease and value of larger investors grabbing several smaller properties in the low cost (therefore higher yield) end of the market.

so you have a second house for retirement income; "a hefty bit of capital gain when it's sold in retirement".  Well you better put some tax money aside to go with that declaration to resell in the future?  Not planning to resell, then lets hear your succession plan then...

Up
0

Setting the limit at two properties is unreasonable.

 

Each of my parents own two properties, as do my in-laws.

My father - Lived in Wellington his whole life, when work moved him to Auckland, he kept his Wellington house as a rental, and bought a home in Auckland

My mother - Lives is Wellington, is planning to retire in the next 3 years, and purchased a retirement home on the Kapiti Coast, afraid she would be priced out of the market, and is renting it out until she retires there.

My in-laws - Upgraded their home, couldn't get a decent price, so kept it as a rental until they could.

 

There must be a million variations on these themes, I believe setting the bar at three properties will go a long way to excluding these accidental landlords

Up
0

These rules will do nothing to raise interest costs for the 'investors'. The minute my bank tries to raise my rates I will go to the other one on the corner and get my 0.25% discount back.

Up
0

This is a stupid idea. All of which workarounds can be found. I have a rental property, but no mortgage on my residence which is in a trust. I would just shift the mortgage, if I could be bothered, and I probably cant for the amount we are talking about.

If they wanted to reduce risk just ban interest only loans. Ongoing interest only loans are something that is relatively new in the last decade or two.

Up
0

If you are mortgage free then you aren't part of the problem.  It's using of multiple home loans (against cheap properties) to overbid on more cheap properties.

Although, yes, it's easy enough to put together a property register that ties the information together for straight number properties owned.

have you unregistered the mortgage document from your title yet?  Banks love to leave them there even after loan is repaid.

Up
0

One issue I think people with trusts need to consider - it is the trust which owns the property not the individual.......so the owner/occupier rule is going to be the one which possibly needs to have some attention focused on it.....

Up
0

So it's all about what I call myself. I only think of the likes of Black Rock who has a multi-billion dollar property portfolio as a true Property Investor.

I wouldn't call myself a property investor if I owned 10 houses. Too few. And RBNZ should only classify me according to MY rules.

Up
0

Oh, I totally agree.  Any threshhold must be precisely calibrated to the point where it doesn't adversely affect ME.  Anything else would be grossly unfair.

Up
0

I wonder if they will classify the purchase of one house (but not living in it for now) as being an investor.  This would catch me out if I still go ahead and drink the Kool Aid.

Up
0

If you invest in property, you're a property investor.  There is no way that 30% of property purchases would disappear if there was a minor disincentive - people are always out to make money, your article explains what desparate lengths some will go to protect that.

 

Unbelievable attitude - talk about the age of entitlement.

Up
0

Oh, don't be so obtuse.

Rightly or wrongly it is a fundamental part of the New Zealand psyche that someone wants to ... buy a second [house] ... to use as a retirement nest egg by selling it much later for a chunky capital gain.

This selfish attitude has served those who adhere to it well over the last couple of decades. But it has also built one of the largest current housing bubbles - as noted by the OECD, The Economist, and others - and it is in danger of destroying the economy if it is allowed to run.

If there really are people who "accidentally" own more than one house - I don't for a minute believe there are, but let's pretend - then the RBNZ is absolutely right to put measures in place to curb their behaviour. Unfortunately, it may be too late.

Up
0

'Typical Kiwi Property Investors ie: Joe Blogs from Te Awamutu, Only buy cheap houses with a potential for good rental returns. They work freakin hard and cut a thin line between future gains and poverty/bankruptcy/exhaustion. I do not know of a single 'Typical Kiwi Property Investor' that could justify let alone afford to buy a house that isn't likely to show rental profit within 5 years. They are NOT the cause of international house pricing.

Up
0

As an investor who has owned 9 properties for many years I do not see any of these changes arresting house prices or causing any form of collapse. All my interest rates are at the lowest point they have ever been and those due for refixing soon will drop by more than half a percent while on the other hand all of my rents will be revised upwards by 6% to 9% this year. One that was recently vacated re-rented for 12% higher than the previous tenant was paying! I have been looking at buying two more renters but every single time have been strongly outbid by Chinese buyers who continue to bid beyond where I see value by tens of thousands. In fact at the group auctions at Barfoots on the North Shore 8 out of 10 homes are selling to Asians. Most of the new housing on the shore appears to be built by Chinese developers and those homes are also selling to Chinese buyers. In 2011 it was far easier to buy - back then I would estimate only 25% of buyers were Asian. I have no idea how many are residents or based off shore. One interesting fact is that when researching homes to purchase, if it is a Chinese owner they usually own many more homes and there appears to be a great deal of trading of homes being undertaken in personal names by Chinese sellers who have only owned the homes between 1 and 3 years - most of these being on sold for very large profits - those who purchased in 2011 in many cases making over 50% above the original purchase price. I wonder if the IRD are onto this massive amount of Chinese trading activity?

Up
0