ANZ economists see planned new RBNZ housing investment rules affecting 'huge number' of properties and having a 'marked' impact on lending

ANZ economists see planned new RBNZ housing investment rules affecting 'huge number' of properties and having a 'marked' impact on lending

ANZ economists say proposed new Reserve Bank rules applying to residential property investors could affect a "huge number" of properties and have a marked impact on overall lending.

In their weekly Market Focus the economists say they believe the changes might have "more teeth" than the 'speed limits' on high loan to value lending introduced by the RBNZ in 2013, and cite a number of reasons why.

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.

"Investors account for around 30% of new lending. By targeting such a large proportion of new lending, the proposals, if effective, will have a marked impact on overall lending."

The economists said the changes would be retrospective, covering the stock of mortgages as opposed to the flow.

"...But this could open a can of worms too. A lot of borrowing is locked in already at fixed rates, which is a legal contract between borrower and lender.

A rush of new fixing

"Arguably we could see a rush of new fixing by borrowers to beat the new regime. But if it is to truly be retrospective, one wonders what legal issues will be raised. The RBNZ has proposed a nine month transition period, which we guess is intended to help iron out these issues."

The economists said while the new measures would apply nationwide, there are regional facets that would make them more effective in Auckland.

"Regional splits from the Census indicate a lower home ownership rate in Auckland (closer to 60% versus 65% nationwide). Around one third of privately owned rental dwellings are in the Auckland region.

"While the Census figures did not provide information of the debt holdings of investor properties, debt levels are likely to be higher in the Auckland market given the higher cost of rental properties."

The economists said that there had been "huge growth" (though they don't quantify it) in interest-only mortgages in recent years.

"That typifies the growing significance of the investor market and realities of yields being below the cost of capital," they said.

Additional costs will bite

"There is little cash-flow for principal repayment. Any additional interest costs associated with regulatory capital charge changes will bite." 

The economists believed that the message from the RBNZ last week was: ‘Enough is enough’.

"...The bottom line is that financial intermediaries will be required to hold more capital against these types of loans, and this will subsequently increase the cost of funding for property investors. And crucially, once a definition is settled on, the RBNZ will have another tool in its kit enabling it to target this group of loans more directly through its macro-prudential policy lens."

The economists said they noted the "immediate outbursts from certain quarters" saying that the RBNZ’s actions would work against the building of houses.

'Self-interested nonsense'

"But such responses are nothing more than self-interested nonsense. Rents in the CPI for Auckland rose only 2.2% last year. That is telling you that a supply shortage is far from the only thing driving the market.

"There are wider issues to consider. Talk to any exporter battling the yield-turbo-charged NZD, or have a look at what a lack of appropriate financial system firewalls did to huge parts of the global economy during the GFC."

The economists said while the RBNZ changes were aimed at financial stability, the implications for the interest rates were clear.

"Anything that takes some heat out of the property market will help keep the [Official Cash Rate] for longer and could potentially take it lower. "

The economists stressed, however, that a lower OCR was "not our central scenario" –  as "a lot of other boxes would need to be ticked", particularly given the domestic economy is solid.

"But it is a credible scenario nonetheless."

What would lower the OCR?

Here's what the economists would see as possibly prompting the RBNZ to reduce the OCR:

A negative global event tops the list. Anything local will be secondary to that.

Assuming no global train-wreck, here is a list of four domestic criteria that would need to be fulfilled.

1.    We keep seeing low core CPI reads. Low core inflation over the back-half of 2014 begs the question of why the OCR is so high (it was top of the list of questions directed at our Chief Economist in the US last week). The RBNZ will be (and has been) rightly alert to inflation risks, but the consistency of low inflation reads cannot be ignored. It may not be a new inflation paradigm, but there are deep-rooted structural forces at play globally keeping inflation low; think on-line shopping, global disinflation, low global wages etc. There are also some transitory forces at work. The interaction of the two is difficult to disentangle, and the jury is still out on which is dominating, but we’re watching our Monthly Inflation Gauge closely; it correctly picked low core inflation in the back half of 2014 but it ticked up in January. 

2.    The NZD continues to frustrate with its strength. The NZD/USD might be down and under pressure of late, but the NZD is high against everyone else. And why not, when 300 basis points of interest rate carry are on offer! Unless the RBNZ actually cuts and flags more to come, or we see a global meltdown, the NZD will remain high; it’s just a question of how high.

3.    We see a macro-prudential response aimed at the property market.

4.    Dairy prices don’t kick-on. A sub-breakeven dairy payout in 2014/15 is followed up by the same in 2015/16. Prices have lifted sharply since the start of the year, but gains will need to be not only sustained but rise further to deliver a meaningfully higher 2015/16 payout. Alarmingly, we’re noticing falls for wider soft commodity prices of late too.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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How can my recently fixed 5 year mortgages be targetted? This is ridiculous. As the article states I have alegal contract with the bank.

Why would banks need to revisit their fixed mortgage book? If the rule is that they need to hold more capital against investment loans then then holding more capital is the primary issue. Passing on higher interest rates is the mechanism of maintaining profit margins rather than meeting the regulatory requirement.
I think there's every chance banks will pass the costs through across all lending - at least initially until all fixed mortgages are due for refinancing.
Your bigger issue might be the value of your properties at the end of the 5 year fixed period.

"Your bigger issue might be the value of your properties at the end of the 5 year fixed period."
Possibly. But it's hard to see how all this tinkering will fix the supply shortage. 

The "imbalance" between supply and demand would be more accurate than simply the supply "shortage".

If demand dries up quickly due to something like a reduction in credit availability that "shortage" can very quickly become a glut.


your fixed term is with the bank and includes clause for them to pass on extra costs or legislative changes.

not only that but if the market changes, a legal Act or statute (or attachment, appendix, or schedule where that extra item is mentioned within the Act or Statute) overrides any contract (that's in the Laws and Act's government Contracts).

standard diswclaimer: not a lawyer. dont believe everything you see on the internet yadda yadda...

OZ, NZ, is there more than a one letter difference, on or no.

This is most clear in Australia, with more than 50% of house purchases going to property "investors" (actually leveraged speculators on the government sponsored pyramid scheme). The majority of these property "investors" incur running losses on their "investment", and are thus without question making the purchase based on expected future capital gains. This is an acknowledged fact. Meanwhile the presstitutes and analysts tie themselves into knots trying to explain why this is not at all a textbook bubble, when an asset is bought solely on the expectation of further rises. The latest explanation is the most humourous: it is not a bubble because Australia has many "coastal cities". Such a non sequitur could only pass as intelligent comment in an idiocracy, it proves not only the idiocy of the commenter but also the stupidity of the society that promotes said commenter to a position of power.


But how can bubble economists admit that lowering rates and changing tax laws boost asset prices, yet simultaneously claim prices are set by an efficient market? This is solved by circular thinking and the so-called wealth effect. Bubble economists believe that if we ramp up asset prices by lowering rates, the higher prices will inexorably lead to higher economic activity (the wealth effect), with the fair value of this increased economic activity perfectly matching and justifying the increased asset price. So if we ramp shares/property, this increases future cashflows for shares/property, so that the initial ramp was just a fair value movement by an efficient market.


The initial manipulation of the market was therefore not manipulation. Because of efficient markets and the wealth effect, markets are essentially non-manipulable, therefore we should manipulate them as high as possible (this power should of course be yielded to only the most prudent and benevolent central bank bubbleheads). This is not meant as parody, this is what bubble economists actuallyprofess to believe. If their premise were correct, i.e. if markets with absolute certainty always were and always will be perfectly efficient, their logic would be flawless. If you knew a car's speed gauge was perfectly correlated with vehicle speed, and could not for any reason ever be incorrect, it would make sense to try and move the car by pushing on the speed gauge with your finger.

Ideally the retroactive clauses will be phased and set so it doesn't cause to much difficulty for most people (only those with massive leverage).

Important to do that, and to mention it ASAP, to stop the usual rush to the buffet effect that we get with legislation.  (remember the green legislation protect and encouraging tree growth - everyone who'd been thinking about removing a tree rushed out and chopped them down !)  But applying it retrospectively to 6 months before announcement, and lighter measures before that, stops that rush.

no ones come out and mentioned by far and away the most important piece of the puzzle... how much higher will the interest rates b for pi's? 0.5% higher would be at the higher end is my best guess, which won't change things much for most.

Reading those very interesting economist comments makes me think the rbnz's recent chats with banks would of been something along the lines of "we are going to try reduce the enthusiasm in the auck market by scaring ppl with some new rules... please play along"... its sentimemt that's causing the problems in auck, so that's what they are attacking

try 2% or more higher.

Care to make it interesting? Box of beers for the person who gets closest? My 0.5% vs. your 2%?
They are not comparable to business loans.
The increased risk profile is only seen during major downturns that NZ has never experienced (examples rbnz used only include markets where over development occured, eg Ireland).  During normal conditions PI's default LESS than owner occupiers, so averaged out, they are likely to be considered very similar in risk profile. 

I'm expecting 1 - 2%.  more than home owners, less than straight commercial risk.
Thing *I* want to know is where is this penatly money going??   It _should_ go back to councils for local development, not into banks pockets as a government sponsored freebie.

(why councils?  because rental property  investment implies renters, so benefit to wider local community fits)

There is a shortage in the supply of affordable housing. There are two ways you can read this: there are insufficient dwellings, or the dwellings that exist are not affordable. The fastest way to create a glut of affordable dwellings is not construction, its price reduction. Let the free market discover the true price of all assets,  goods, and services with no intervention and the fastest thing will happen. A return to market pricing for US interest rates will do far more for affordability than domestic intervention. Mr Wheeler, who clearly is a thinking man and has the respect of his peers would do better to lobby the US in union with them.

No, there is too much demand.
The free market gets manipulated by the players so really there isnt much sign that its a true level.

Not when overseas money can buy cheaper here than in their own country.
Free market would just make a feeding frenzy for foreign backers selling to each other - no payoff for kiwis there.

Where is that broken record "Your Landlord" when you need him.  It's still good isn't it?

This proposal by the RBNZ is utterly stupid, and defies all logic  .
In the absence of alternatives , demand for housing is "inelastic " so increased demand without supply can only lead to price increases .
So whats the RBNZ trying to do ?
They are trying to control an over- priced-  supply- starved market ............. BY MAKING IT MORE EXPENSIVE !
Dont they know that an increase in the cost of supply ( in this case the cost of borrowed money ) will lead to an increase in the cost to the consumer . In this case the tenant?
Demand for a roof over ones head is not elastic when there are not many alternatives  , we have to have shelter , and where supply is constrained  the price can only go up , until supply meets demand .
And Auckland Council is hell -bent on making sure landowners like me continue to graze sheep on our properties  rather thatn pay $1,0 million in Council Fees to subdivide the sections up .