By Bernard Hickey
The Reserve Bank of New Zealand has announced Auckland rental property investors must have a deposit of at least 30% in a sweeping new escalation of its measures to try to slow house price inflation in Auckland.
However, the bank has eased the current Loan to Value Ratio (LVR) restrictions for property buyers outside Auckland and has exempted new builds from the new restrictions on Auckland rental property buyers.
Reserve Bank Governor Graeme Wheeler said in the news conference after the release of the bank's half-yearly Financial Stability Report that the bank's modelling suggested the measure could reduce Auckland house price inflation by 2-4% per annum and reduce Auckland sales volumes by 8-10%. He also said it would be useful for the Government to collect information on non-resident buying.
“Auckland’s median house price is 60 percent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year," Wheeler said.
"This reflects ongoing supply constraints and increased demand, driven by record net immigration, low interest rates and increasing investor activity. Prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices," he said.
In response, the bank said it proposed the following changes to its LVR policy from October 1:
- It would require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30%.
- It would increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15%, "to reflect the more subdued housing market conditions outside of Auckland."
- It would retain the existing 10% speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80%.
“We are proposing these adjustments to the LVR policy to more directly target investor activity in the Auckland region, where house prices relative to incomes and rent are far more elevated than elsewhere in New Zealand," Wheeler said.
“The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market.”
Wheeler said the new measures aimed to moderate housing demand, but policies to increase supply remained the key to addressing Auckland's housing imbalances.
New builds exempted
Deputy Governor Grant Spencer said the Bank would issue a consultation paper in late May providing further details and seeking feedback on the new LVR proposals.
“Prior to the proposed introduction of the policy in October, we expect banks to observe the spirit of the restrictions and not seek to expand high-LVR investor lending in Auckland," he said.
Wheeler later said the Reserve Bank expected the banks to observe the spirit of the new restrictions in the interim period before October 1 and he would be meeting the chairs of the banks and their executives to discuss the new restrictions.
“Given the importance of encouraging residential construction activity in Auckland, and consistent with the existing LVR policy, the proposed LVR restrictions will not apply to loans to construct new houses or apartments."
Spencer said the Reserve Bank was establishing a new asset class for bank loans to residential property investors. Banks would be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending, he said.
“Following a lengthy consultation process, we have decided that a residential property investor loan will be defined as any retail mortgage secured on a residential property that is not owner-occupied.”
Holiday homes not covered, unless rented out
Spencer later clarified that the policy did not apply to holiday homes, although he said consultation would look at situations where holiday homes were rented out for periods.
A summary of submissions received in response to the consultation would be released later this month, and details would be provided on the implementation of the new asset class, including on the proposed capital treatment of residential investor loans.
The new asset class would take effect from 1 October 2015 for new lending, with a further phase-in period of nine months for the reclassification of existing loans.
“Given the broader risks facing the financial system, it is crucial that banks maintain their capital and liquidity buffers and apply prudent lending standards. Later this year the Reserve Bank will be reviewing bank capital requirements in light of global and domestic developments affecting the safety of the banking system,” Spencer said.
(Updated with more details, comments from news conference)