RBNZ 'over estimating' impact of property investor crackdown

Property

Bank CEO suggests many Auckland residential property investors will be able to side step incoming RBNZ 30% deposit rule

29th May 15, 11:31am by Gareth Vaughan

The Reserve Bank could be over estimating the impact its move to make Auckland residential property investors borrowing from banks have deposits of at least 30% will have, says the Co-operative Bank's CEO Bruce McLachlan.

Earlier this month the Reserve Bank announced from October 1 new residential property investors in the Auckland Council area using bank loans must have a deposit of at least 30% in a move to try and help cool Auckland's red hot housing market.

Bernard Hodgetts, head of the Reserve Bank's macro financial department, told interest.co.nz about 50% of investor activity that involves borrowing from the banking system takes place at loan-to-value ratios (LVRs) of greater than 70%. Of this, Hodgetts said, most is concentrated at LVRs of between 70% and 80%. The Reserve Bank says this data comes from its surveys of bank lending, gathered under its prudential regulatory powers, that's not publicly available.

"I think the Reserve Bank have over estimated the impact of their initiative because the current weighting of investor LVRs is heavily in the 70-80% band," said McLachlan who is a former Westpac NZ executive where he was acting CEO for nine months during 2008/09.

"I think it sits there because that's where investors choose it to be rather than where it has to be. So through their use of their security they've got in other assets, I think they (investors) will quite easily still do what they want to do and borrow what they need at a 69% LVR as opposed to a 75% LVR."

"I just don't think it's going to suddenly remove a huge amount of demand from the market," McLachlan, who says the Co-operative Bank is "underweight" in property investor loans, added.

"A lot of people choose to structure it that way because they like to have the debt against their investment properties so then they can claim that as a tax deduction. I think they (the Reserve Bank) might have slightly over estimated the impact of their initiative on the investors directly."

McLachlan does, however, support the moves by both the Reserve Bank and government to try and cool the Auckland housing market, noting "clearly the capital gains were unsustainable."

"I think the combined efforts of all the initiatives are probably going to check the market upfront. So I think you'll see people back off a little bit initially while they wait and see what the impact of that is," said McLachlan.

"One of the challenges for the Reserve Bank though is you've got the interest rate effect at the moment. Generally mortgage rates have been in decline for the last three or four months and that's certainly sparked more activity in the broader market."

On top of this cuts to the Official Cash Rate are now expected, he added.

In terms of the government initiatives, Prime Minister John Key announced a range of measures this month to crack down on property speculators who sell houses within two years, with foreign buyers having to register with the IRD and have a New Zealand bank account. This month's Budget also included $52 million for a new "capital contingency fund" to help facilitate the development of up to 500 hectares of state land in Auckland.

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12 Comments

by Simon | 29th May 15, 12:12pm 1432858323

Yeah but do they want to use non-investment property as security to get additional debt to buy more investment properties in auck at already stretched valuations? When they can just as easily use the auck cap gains of past few years to buy into markets outside of auck that have yet to move higher, and that have yields that make sense?

I think viewed alone, the author has a point, but together with other factors the 30% rule will have a huge impact

by bw | 29th May 15, 12:38pm 1432859884

To get yield, you have to have tenants who will provide that to an owner. Why are the Regions lower in capital price than Auckland? Because there is less work and less opportunity and lower wages in those Regions - much less, on all counts. So let Auckland property owners sell up or just plain switch to the Regions for their next adventure....but make sure there actually is a yield to be had first!

by Simon | 29th May 15, 4:52pm 1432875175

All of those factors you mention have been baked into price differentials between auckland and elsewhere for decades.

The 5-10% (in wellingtons case, no %) higher wage or (arguably) slightly higher number of job opportunities has not suddenly started going through the roof last 3 years to justify a greater divergence between auck and other cities.

In fact for mine, student cities (dunedin with 15% pop students, and P.N with 11% pop students) are the best/safest defensive play at this part of the cycle, not just because this leads to overall higher yields in these cities, or because of foreign student numbers, but as was seen during GFC, when people lose jobs they upskill and these regions hold up very well on this basis.

by Uninterested | 29th May 15, 8:34pm 1432888493

I wonder why this is being said so publicly....in the hope that the readers will perhaps launch into Palmy Nth and Dunners?

by Simon | 30th May 15, 9:33am 1432935207

I post on here my positions in the hope ppl smarter than me might challenge them and state why I'm wrong, or at least discuss any holes in my views that i might not be seeing. Free criticism, free insights from others can only be useful.

Ill often challenge anyone/ any author that attributes Auckland house prices to things other than a combo of chinese buyers + over the top senriment which i think covers 90% of the reasons for price moves. If I at least make ppl think a bit more than just 'auck prop is a sure thing because of a massive shortage' then that's something of value i think I'm offering, even if i turn out to be wrong, questioning and challenging views is a good thing.

by two otherguys | 29th May 15, 2:38pm 1432867085

There are many playa's in the Auckland property market - not just investors

1. First Home buyers
2. Downsizers
3. Upsizers
4. Relocators
5. Investors
6. Developers (spec builders)
7. Foreign FIFO Investors
8. Migrants
9. Flippers
10. School-zone-shoppers

This latest is a contest between a quick-turn property developer and a Fly-in-fly-out investor
http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=114…

The spec-builder-developer got knocked out at the final turn

That is not a rental investment yield play

by Simon | 29th May 15, 4:55pm 1432875341

and the fly in fly out chinese investor won't be worried after oct 1 when they are required to give IRD numbers to govt. ?

Auck prices will be flat for 5-10 years, why leverage up and lose $ every year hoping for capital gains in a broken market like that

by Uninterested | 29th May 15, 8:41pm 1432888908

"A lot of people choose to structure it that way because they like to have the debt against their investment properties so then they can claim that as a tax deduction."
This undermines his argument. He is trying to tell us that a lower debt is no problem for investors, here he is saying that higher debt is what they want!
This 30% requirement is only a snapshot. What I want to know is what the banks will do with the investors on interest only loans when prices fall... Negative equity....

by tim12 | 1st Jun 15, 5:00pm 1433134825

The very obvious thing with globilisation is that in the long run the people that can borrow at the lowest interest rates (big corporates and people in powerful position) will own everything. Basically because they are chasing yeild and they don't require as much because they are borrowing money for nothing. So a dairy farmer may be struggling at the moment to pay their interest bill, but a chinese coroprate farm in NZ, doesn't care about the low pay out, only a matter of time before they can expand. Likewise with Auckland property when the market peaks and locals traders stop making capital gain and they want to sell because their yeild is too low, who can buy? Foreigners who can afford to own property with lower yield because they are borrowing for less. It's called interest rate apartheid.

by Steptoe | 2nd Jun 15, 8:47am 1433191632

"They" how many times do posts say that...?
And if so how creditable are he suppositions?

This comment sums the whole thing up
"I think they (investors) will quite easily still do what they want to do and borrow what they need at a 69% LVR as opposed to a 75% LVR."

"they" investors have 3 to 5 houses on the run...often a syndicate to pool resources....
So lets assume they have been.. incorrectly.. borrowing above the 70%.. now they have 2 to 4 houses on the go at once...and those who had 3 to 5 and ready to move to 4 to 6...simply have to st5ay at 3 to 5 for a couple more months.

And As I have said before.. most of the investments happen to be in the upgrading of our current housing stock....pick up a do upper...spend between 20 and 50K over couple months...then decide if a 'keeper ' for the handful of rentals.. if not flick it off at a nice profit plus in this day and age a capital gains.
Have a god look around the lower to mid income areas of Auckland suburbs...notice any difference over the last decade? how so many streets are tidier now?
Maybe why the RB . government are only things that look good on paper and know have little effect is they know our low to middle income housing stock of the last 50/60yrs is and has been in need of a big overhaul / upgrade...
Owners cant afford it any more... dedicated landlords cant....an the upgraded home brings in higher rental and better care conscious selected tenants
And many of these upgraded homes.. palaces to the immigrants who are required to enter the country , get residency.. need a big money bag with them... a ready made continuous supply of buyers

by fat pat | 2nd Jun 15, 9:19am 1433193591

look at the home ownership stats. Only the minority are benefiting! What you're talking about. Do you really think a FHB tenant cares that houses on realestate.co.nz spick-and-span. Do you think that the FHB feels a rapture of joy that their Chinese landlord who owns 5 rentals is enjoying spectacular capital gain?

by tim12 | 2nd Jun 15, 5:27pm 1433222826

I don't begrudge anyone in Auckland making money from property investment. Globalisation is great for individuals when you are winning. The same thing happened with farming. But prices could too high in the future for the next generation of kiwis to get into the game.