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RBNZ mulling income based rule in push for banks to hold more capital against loans to investors who own multiple rental properties

RBNZ mulling income based rule in push for banks to hold more capital against loans to investors who own multiple rental properties
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Gareth Vaughan

The Reserve Bank is considering introducing an income based rule rather than a set number of properties per investor as it strives to make banks hold more capital against loans to rental property investors.

As reported by interest.co.nz last week, the Reserve Bank has delayed plans to introduce rules whereby banks would have to hold more capital to support mortgages to rental property investors with five or more properties. The new requirement had been proposed to start from December, but will be delayed until at least the first half of 2015 while the Reserve Bank continues consulting with banks.

Speaking at the Reserve Bank's Financial Stability Report press conference, Deputy Governor Grant Spencer said the Reserve Bank is proposing a separate asset class of residential property investment and trying to get consistent treatment across the banks.

"But different banks have had different treatments and so it's a matter of finding the one that's most sensible and the industry is happy with. So that consultation has been ongoing," Spencer said.

"We're talking about a rule if you have five investment properties, (but) we're not so sure that's the appropriate rule to adopt now. It may be more an income based rule."

"We're still discussing it further with the banks and will be consulting further in the first quarter," Spencer added.

See our earlier stories on this issue here and  here and here.

The Reserve Bank says it will also be proposing a capital adequacy treatment for reverse mortgages. It currently has no explicit capital requirements for reverse mortgages.

Meanwhile, Spencer said although leveraged rental property was an important part of the market, investors weren't dominanting the New Zealand residential property market to the same extent they're currently dominating the Australian market.

"So we're not overly concerned with that particular pressure," he said.

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18 Comments

This will be interesting. 

UK has just implemented a limit on lending to 4.5x income.

Will stop the negatively geared investors in their tracks.

UK has limted it to 15% on a number of loans basis (i.e not total value).  Would be a very bad choice to do the same here (use number of loans not total value of lending) as all banks would halt all small mortgages to low income families in regions to focus on very large lending to aucklanders (i.e all 15% of allowed loans will be given to aucklanders as this gives banks best bang (largest lending) per loan made at over 4.5x income).

 

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Indeed.  I live in London.  It's amazing how quickly the property mania went into reverse in the space of a few months this year.

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xelnaga when did the london property market go in to reverse? is it still hapening and do you think it will continue? interested in your opinions/experience as we may very well be buying a house there in six months time.

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Here's an example of a plausible timeline  - US/UK/EU falls out without Russia - money leaves London. Read more

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Massive slowdown started in the middle of this year, the sentiment has completely changed.

There are a lot of price drops going on now, mortgages are much harder to get, and the only way interest rates are going is up.

As for the future, who knows.  Markets are driven by sentiment and people are irrational.

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Buying oneself a HOME IS an emotional thing to do, you are, after all, planning to make your HOME there. What needs weeding out is people buying what could be someone else's HOME for reasons of investment only, after which it just becomes a roof over someone's head. And landlords wonder why we now have a class that don't give a damn about houses. It's the investors that need weeding out so that ordinary people can get about the business of setting themselves up in a HOME

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risking an investment, placing faith in ones' system are also very emotive things to do, that's why it's so important to learn not to let it affect judgement - its also why salespeople focus on building emotive connections and oiften work those that are more emotive in their decision making, trusting their partner will follow along (as the usually do)

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thanks for the heads up xelnaga. i appreciate it. will see how it develops and how much under asking we offer if and when we find a place. and agreed raegun, with your comment below. housing being treated straight out as an investment is screwing with people's lives. everything with a price and nothing with a value. sigh.

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Though given British politics and the power of the financial sector you can imagine it being reversed if it is too effective. Labour and National here have both decided it is too politically damaging to have Auckland house prices drop on their watch. Make a few noises without meaning any of it. 

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Make the default equity requirement 30% with higher LVR only available to owner occupied dwellings by way of statutory declaration. Set a prohibitive penalty for those who lie.

Owner occupied could be limited to cover primary and secondary dwellings for a family, holiday homes should be declared as such and should not count as being "occupied". Couples applying who own properties separately will be required to combine them on the application and all properties considered. Children under 18 or in education count as family occupiers as do elderly without property of their own.

The aim is not to penalise the rich here but deter the greedy. Like a bigger kid always does well in a lolly scramble, the little ones need to be given a chance to get a share without fear of being shoved aside.

 

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At 4.5x income PI's in auckland would need to be running much lower LVR's than 80% unless they have a significant personal income.

 

e.g: $3mill property with 50% equity, 1.5mill loan, would require income of $330k p.a at 4.5x multiple. That would mean an 11% yield across properties which in auck is impossible.  Take personal income of 100k p.a, then required yield would be 7.7%, still highly unlikely in auckland. Any PI's more highly geared than 50% would need even more income/higher yields to get more lending.

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Even a more seasoned PI (e.g 5mill to name from 15-20 years of PI) who has enjoyed tax free capital gains through the 2000's would be struggling to get more lending if the 4.5x rule came in.

 

e.g 10mill portfolio at 50% equity, 5mill lending, required income = $1.11mill, or 11.1% yield across properties in auck.  If has a job on say 110k, yield required still 10% across portfolio. 

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Suprised people pay 10+% on auckland values, thats lot of cost to recoup from ...where?

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That was just an example to show the sort of yields required if the 4.5x income restriction as in the UK came in.

Auck yields closer to 4%. Take 5% gross to be generous assuming investors buy lower priced, higher yielding properties:

So a property portfolio in auck of 10mill would return gross income of 500k, and if they were full time PI, with no job, then they would be sitting at:

* 16x income at 80% LVR

*14x income at 70% LVR

*10x income at 50% LVR

*4.5x income only occurs at 22.5% LVR; i.e of the 10mill property almost 8mill would need to be their own $

 

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Number of properties is better for the country as it encourages the sale of lower value holdings to new entrants, and thus giving the average jo and FHB a step onto the ladder without damaging other folks.

SO

If RBNZ drops that in favour of Income based, then we know what's up (it's playing to government large holder cronism) and who's the team owner (not team NZ)

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LVR limits on investors would be fantastic.

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Steve Keen and I'm sure others suggested a 10 x annual rent limit on valuation for mortgages

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