New figures show the RBNZ attempts to dampen rampant housing investment have failed

New figures show the RBNZ attempts to dampen rampant housing investment have failed

By David Hargreaves

It's buy, buy, buy for housing investors, as new figures out today show that in March the share of mortgage money borrowed for houses by investors climbed to over 35% of the more than $6.5 billion borrowed.

The latest release of residential mortgage lending by borrower type figures, which the Reserve Bank has been publishing only since 2014, shows that the amount of money borrowed by investors hit a new high both in terms of the amount and the percentage of the total in March.

It beat figures recorded in September, at which time there appeared to be a rush by investors to get in ahead of new RBNZ rules.

The latest figures showed that Investors borrowed $2.322 billion of the $6.572 billion (also a new high figure since 2014) that was borrowed in March.

These are national figures. Recent indications are that investors in Auckland might be accounting for more than 45% of the borrowing there.

Either way the latest figures show that the attempts by the RBNZ to rein in the enthusiasm of investors have failed. The question is now, what further measures might the central bank be contemplating to dampen the flames.

But it is probably worth noting that the amount borrowed by first home buyers - at $753 million - hit a new post-2014 high as well. The proportion borrowed by first home buyers was just under 11.5% of the total - and it has remained remarkably consistent around 11%-12% levels in recent months.

In November the RBNZ introduced new rules under which Auckland housing investors can't borrow more than 70% of the value of the house they are buying.

After investors hit about 34.5% of the amount loaned in September - which was a big month for borrowing, with just slightly less in total than March - the figures dropped off sharply in October.

In that month, immediately prior to the introduction of the rules, the proportion of housing investors slumped to just 29.3% of the total.

However, the figures soon began to bounce back and have now hit new highs.

The March figures show that two-thirds of the over $2.3 billion borrowed by investors was for houses with a deposit in excess of 30% - bearing in mind that these are national figures and that people outside of Auckland are not subjected to the 30% limit.

The figures demonstrate that investors have easily found ways to get a bigger deposit, even with rising house prices.

Back before the measures against Auckland investors were announced in May 2015, more than half of the amounts borrowed in any given month were on houses with deposits of less than 30%.

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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I think they will go to 50%

it needs to be nation wide

Big Daddy is right. The boomers and X are going for it. They must think Auckland can go beyond 10 times. Brave!!!!!!


Well, not this X.

Why can't it go beyond 10 though?

Its considered a seriously overheated bubble and in danger of a collapse, but yes given there are it seems lots of people buying still maybe it will go a lot higher yet, 12? How many and how desperate are chinese trying to get their money out of china? If other major cities around the world are any indication quite a lot.

Or 14 or 20. Who knows? Rationality went out the window a long time ago.

X?! You are kidding right? Don't lump us in with the Boomers. At best we'll inherit the crumbs they leave behind. Most of us are still renting.

I can understand why people are buying houses for these houses based on the current mortgage rates, as the yield is approximate to the current mortgage rates, giving you reasonable net neutral cashflows.
However, if the mortgage rates go from 4% to 5.5% (not out of the realm of possibilities), you can't just raise the rent by 33% (assuming gross yields of 4.5% and 6% to cover the mortgage interest respectively) so your yield continues to approximate mortgage rates. However, people buying property will want at least 6% gross yield so the rent covers the new mortgage rate, thus house prices drop.
3 bedroom house, weekly rent = $550
At 4.5% gross yield (to approximate 4% net) = $550 x 52 / 0.045 = $635k
When required gross yields increase to 6% (to approximate 5.5% net) = $550 x 52 / 0.06 = $480k

Lets say you borrowed at 70% LVR on your purchase at $635k, this means equity of ($635k x 30%) $190k invested
In the above scenario, the house price has dropped by $155k, thus leaving you with $45k equity, a loss of 76% of your original investment. This is with the only assumption that the required gross rate of return on a rental increases from 4.5% to 6% - not beyond the realms of possibility given historic interest rates.

Leverage is a two-way street - it increases your gains when prices go up, but amplifies your losses when they go down.

sferris, Finally someone who understands investment. Keep it to yourself though and let the fools be fools

Yes, understand the present value of a perpetuity and danger of leverage in the hands of fools - all sound stuff.
However, gross yields are more like c.2.5% - 3.0% at the moment aren't they?

Well below current mortgage rates.
Net yields are worse, so nowhere close to cashflow neutral even on an interest-only basis.
All told - an even greater risk of loss under your method.

... Then you have to provision for R&M and the hands-on nature of it.
Allround shit "investment" if you ask me.

Only this is not an investment, but a speculation on capital gain....
Or a place to park some money for a while in order to launder it.

Interest rates wont though.

Why not? You don't think it's possible to return to a more "normative" inflationary environment?

I think the catalyst will be current squabbling over oil production - The once cosy OPEC cartel is now dysfunctional.
The Saudis operating below break even, in full knowledge that they are driving other oil nations, and importantly private US shale producers, closer to sovereign default / insolvency.
They are slowly strangling other oil producers.
At some point soon this will reach breaking point. Oil supply will stop in these countries due to lack of financing and increased unrest.

Now you're thinking "how is this in any way relevant to interest rates?" - depressed oil prices are one of the principal reasons we are currently in this low inflation / interest rate environment.
A decrease in oil supply will flow to consumer prices. Oil price increases affect almost every consumer good -
Prices of consumer goods up = inflation up.
Inflation up = monetary policy response = OCR up.

Policies to restrain bank lending most effective suggests Gould:

What's the problem. Everyone is only doing their best to be "wealthy" any way they can. I thought being wealthy was the name of the game. Isn't that the human's purpose?

It certainly is a "passion" for some, even the be all and end all.

We all know it's not the Kiwi Investors that have pushed up house prices in Auckland. It's the Non-Resident Investors from Asia.

Has everyone already forgotten how the Auckland market almost ground to a halt when the IRD requirements came in to force last October. And there was a huge switch from Auctioned properties to 'Priced' since demand was drastically reduced.

So what's happening now? I heard it was pretty much all Kiwi investors buying at the moment and only 10% overseas money

Investing adage is that "price is set at the margin"
Applies on the up and on the down. The only variable is stickiness or the realisation that inaction is disasterous.

Proof? That's just anecdote.
Let's wait for the data

Won't tomorrow be interesting. We will see and hear either of two things:

1: more head in sand talking points and denial
2: a new strategy that hopefully makes a real point of difference and change of direction

My bet is No:1 and I hope to lose my bet

What's funny is rents in Auckland have gone up about 5 to 10% under everyone's noses. Once we introduce all the new taxes and restrictions watch the rents go up another 10%. The reason why rents don't go up faster is that most landlords are non professionals hence to nice to put rent up say at 2.5% a year.

Isn't it 3% in the last year?

There is also the fact that wages aren't rising very fast. People simply can't afford major rent increases.

The problem is that the BANKS are lending - to basically anyone. As long as they are lending - the prices will go up. Investors should invest THEIR MONEY not the banks's money - 70% deposit on the investment property. Ban overseas buyers, tax heavily any other property than FAMILY HOME (1st home where you actually live).

What is happening is INSANE , out of any control - and only 3 institutions are benefiting from it: Banks - higher mortgages = more interest, INSURANCE - higher 'value' = higher insurance fees, CITY COUNCIL - higher values = higher rates.

I feel sorry for New Zealand - such an open and great country.... wasted as it was totally unsuitable for the current 'global market'.

There it goes - the NZ lifestyle and unique NZ atmosphere - now it is becoming like many other cities in the world. What a loss....

Most you out there would seem to have some sort of understanding of Demand and Supply basics. However, when I see figures quoted like only 10% it makes me wonder how far you progressed in
The relationship between price changes and supply and demand comes down to their relative elasticities (responsiveness). Take petrol as an example. If the price of petrol were to suddenly go up, would you buy less petrol? Due to our useless public transport system, the answer is probably no.
As Auckland's housing stock (supply) is pretty constant (not helped by excessive immigration) this means that any demand increase will cause the same percentage increase in price. At the moment there are many factors increasing demand, low interest rates, no capital gains tax, favourable taxation regimes, the list goes on.
The argument that increasing supply will reduce prices is utter crap, firstly it doesn't address the other side of the equation, demand, or secondly, their relative responsiveness.

Well at this point nothing is really being addressed at all. In regards to your petrol analogy, people still have the free options of walking, biking etc so it's probably not the best example of being locked into a price war. I think whatever eventually happens Zorro will be just the inevitable nature of economic imbalances. No one thing will tip it, but rather a collection of events

Was at the Bayleys auction room today and was just over $800,000 for this 2 bedroom unit!

You are obviously an agent BigBlue but surely even you can see how out of kilter that is with the rest of the world when you think how mediocre salaries are here. It's so obvious where this is heading.

BigBlue may not be an agent. I often drop into those auctions just to view the screen that displays the results in the foyer. B&T have most of the central Auckland houses and if you are interested in that area it is the place to go. It's harder to find the B&T results online.

That's largely incorrect.
I have a Masters in Economics, and am very well read in Urban Land Economics. Supply is critical, and in particular the elasticity of supply (responsiveness of supply to jumps in demand). There's an awful lot of literature on that. You can do your own research, but I'd start with Glaeser from Harvard, Gyourko from Wharton, and Dr Paul Krugman (Nobel Laureate). OECD economics unit have also done a lot in this area.
So what do we do to make housing supply more elastic?
- Liberalise planning rules
- Streamline and de-risk planning process

If you free up the ability to build, and to build quickly, then the building sector can develop more scale and capacity with more certainty.
As I've said elsewhere on this website, you are also then more likely to get more modular/ prefab building, which further helps with cost/responsiveness.
Not rocket science!
Having said all that, I think some policy work on the demand side is also justified.

You are right, it would appear the biggest hurdles to addressing supply are local councils and this has been an issue for well over a decade. They appear to restrict supply on purpose to encourage house price inflation, thus giving their rates increases via land values the boost they want. Councils have a major finger in this pie.

I have a masters in common sense. This current supply and demand for global property cannot be explained in books, as its never been experienced before on this scale. Greed is infinite, so the more you supply, the more you feed demand, so the one side doesn't counteract with the other, instead they grow in unison.

Justice, due to Auckland's brilliant public transport system I can either drive to work, 20 minutes, or take two buses 90 minutes, what would you do?

Buy an electric scooter mate! I have two of them. Some great ones out there. Mine is NZ made.....cause it's my own design

I take the Train and bus.

Fritz, I also have a Masters in Economics (big deal) what we are talking about here is two different markets. Home Owner and Investor. Investors have been convinced by NZ Invest etc, to use their equity in their home to leverage up into rental properties, deduct expenses, reduce their income tax bill, utilize working for families to help pay their accomodation. The hard sell about this is incessant, media , marketing, blah,blah. The fact that you can buy a house and claim expenses etc, and call it a LAQC when it wasn't set up to generate an income is insanity.

Correct me if I'm wrong but was not the LAQC entity removed in Nationals first term?

It was replaced with the LTC (Look through Company).
These companies are only really necessary if you are renting the family home and moving to another or heading off overseas. You don't need a company if you go out and buy a couple of rentals specifically for renting out.

Fritz, I also have a Masters in Economics (big deal) what we are talking about here is two different markets. Home Owner and Investor. Investors have been convinced by NZ Invest etc, to use their equity in their home to leverage up into rental properties, deduct expenses, reduce their income tax bill, utilize working for families to help pay their accomodation. The hard sell about this is incessant, media , marketing, blah,blah. The fact that you can buy a house and claim expenses etc, and call it a LAQC when it wasn't set up to generate an income is insanity.

You don't need a vehicle like an LAQC, now LTC, to reduce tax payments. The tax return is only on losses so it is not like the landlord is making anything out of it. It just seems that some people may think landlords are raking it in through tax returns when it is just reducing the loss somewhat. You shouldn't have to pay tax on no earnings.

name any business where the loss can be shifted to offset the tax on a shareholders other income.
in fact IRD did some medical professionals who tried that trick setting up companies owned by trusts and paying themselves a lower wage with the profits being passed to the trust in dividends and taxed at a lower rate
it is an anomaly as owning rental houses is not looked up by IRD in the same way, they don't class as a business but instead as a investment
its time neg gearing was got rid off, and the losses are ring fenced against the property to reduce the tax paid on the GC when sold

If you pay 30k in interest while earning 30k in rent then the tax should be zero, no?
The amount landlords claim back by offsetting on other income is fairly minimal. If that was not allowed it probably wouldn't have much effect.

Ok, well I'll stay with the Harvard Professors and Nobel Laureates thanks!
Wasting my time if you essentially dismiss any significant supply side role!
I, at least, concede significance (if not dominance) to the demand side, so I wonder which one of us is being a bit obstinate here???
Good night and enjoy your demand side dreams!

I have no degrees in economics but I don't think you need one to realise that it is a combination of factors on both sides. Too many people, not enough homes, low interest and tax advantages for landlords. No Nobel Laureates required!

No one dismisses your argument. It's just our retarded government has framed the problem as having ONLY supply-side solutions while refusing to acknowledge any of the demand-side solutions. Looking at only supply-side solutions is literally 'pissing into the wind' without tempering the demand for housing. This stuff is not rocket science!

Surely, one would not set up any type of entity to generate an income less than its expenses?

Yes you would if you were taking a long term view. Many companies are loss making in the first few years. Loss making rentals eventually become earners if you wait long enough. I bought a house in 2002 for 260k which could now earn $600 a week (12% yield). Quite nice for your retirement.

8% yield after taxes. Couldn't you distribute that income to your adult children ?

My children are school age but I thought we were supposed to save for our retirements to supplement superannuation and rental properties are one way of doing that.

So one tries to minimise being the burden on Super and you still get shot down?

how does making your own provision for your old age reduce the burden on Super?
or did ZS claim he wasn't going to claim super? I didn't see his anywhere.
Just like all those national party voters who were foaming at the mouth when Super was first proposed, and are now nonetheless claiming it, also.....

ZS, I get your point, sales maximisation, market share etc,. But not if the business is set up to make a loss so as to benefit from the taxation system. With a rental property you are not creating jobs, not creating anything of benefit (besides add on selling industries, eg, stagers) that is, you are not increasing the income producing capacity of NZ. I understand what you are saying from an individual viewpoint, not from the point of view of benefiting the NZ Economy.

Well, I know this annoys many people, but you are providing accommodation for people. I notice that new tenants next to one of my properties are driving an almost new Mercedes. My car is 20 years old and not a classic. People make their own choices about what to purchase and where to live. Rental properties provide extra choice.
Also I bought a house off someone who wanted to put the cash into his business.

I would choose the Merc if I were you. Why not spoil yourself? You can afford it.

Frugal habits developed through years of heavy mortgages are hard to get rid of.

he is positioning himself for a safe landing when the next crises comes. Merc is a toy that will not save anyone in a crises

Here in the South Island it's not impossible to get +8% gross yield on plain-jane multis and student houses, giving strong positive cashflow from day one. Capital gain although icing on the cake is not essential with this much cash coming off the property, although in fact there is that too. Times have never been better in this space where the yield is twice the mortgage rate. I recall Bob Jones mentioned in one of his early books starting out in the '60's buying office buildings returning 10% and borrowing the money at 5%. He couldn't believe this was happening, but it was. Just like now down here, in NZ's second biggest city and probably other places too. I have always remembered that little snippet.

If you are investing in Auckland for the long term, have a good amount of equity behind you, can service the repayments and can ride out the cycles then you can't really go wrong. Unless Rangitoto erupts, our water supply gets tainted, we get nuked or some other catastrophic event happens, Auckland will always go up. We may have another drop if another GFC happens or if migration slows and interest rates go up, but give it time and prices will boom even higher. Look at how Polluted China is now, look at the state of Africa and the Middle East, the last Terrorist attack in Paris saw over 10,000 millionaires leave to other countries. I could be here all day. NZ is a reasonably safe, beautiful country with a plentiful supply of food, rain water, good soil, schools etc etc. Now wonder so many people are wanting to invest into this amazing place.

Not sure how many of you commenting on here have traveled around the world or not but if you have you would realise how much of an amazing place Auckland and NZ is to live in and how valuable our property really is. Auckland is now an international city, it is consistently voted as one of the best places to live in the world and we pretty much have everything down here. Look at the prices in London, New York, Hong Kong in comparison? With so many other countries in the world turning to crap, Auckland and NZ will continue to become more popular.

Someone needs to need to look at negative gearing. We have a situation where property investors are getting a tax benefit from investing in a cash flow negative asset, and paying no tax on capital gains from that same asset. Combine this with the fact that benefits like accommodation supplements and working for families are being passed straight through to (some) property investors to support rent prices. Property investors are a very large beneficiary group. Us PAYE tax payers are being treated like mugs.

its so bad now, that we have people living in state houses buying rental properties as they can use the rules and GC is not counted in any way.
in the end yes those of us paying tax are subsidising this whole mess, not only through neg gearing but housing supplements etc. and that bill will only become bigger in the future

I think David has missed seeing the elephant in the room. Of course investors will have borrowed 35% of the total money borrowed. I am surprised it is not actually more. Why do you ask. What is the significance of 35%. Well actually this is the percentage of all dwellings in New Zealand that are rentals. So on David's figures it looks like owner occupiers are buying at an identical rate per dwelling as the investors. The ratio of rentals / Owner occupiers is going up so the borrowing indicates that the rental supply is falling behind demand. Perhaps the banks need to lower the interest rate for investors in order to encourage more rental stock creation. Like building more rentals. Come on everyone just get over it. Some people produce products and need to be rewarded for doing so.

A large percentage of houses are debt free.

LOL investors creating more supply of housing