Reserve Bank takes aim at Auckland property investors with new lending restrictions
The Reserve Bank will target Auckland property investors with new lending restrictions as it looks to take the heat out of the property market in the country’s biggest city, which it sees as a key risk to the nation’s financial system.
The bank intends in October to introduce new limits on lending to property investors in the Auckland Council area that would require those borrowers to have at least a 30 percent deposit, it said in its six-monthly financial stability report. The Reserve Bank said the potential for a sharp correction in the Auckland market has increased since its November report, with investors the key source of new demand for the city, accounting for about a third of new lending in the six months ended March 31.
“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 more elevated than elsewhere in New Zealand,” governor Graeme Wheeler said in a statement. “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”
Reserve Bank modelling predicts the new restrictions will cut Auckland property transactions by between 8 percent and 10 percent, and slow house prices in the country's biggest city by between 2 percent and 4 percent, Wheeler said at a briefing in Wellington.
The level of lending to property investors has increased to about 40 percent of housing market transactions from 35 percent before October 2013 when the LVR lending restrictions were first imposed, and about half of that is at a loan-to-value ratio of 70 percent or more, Wheeler said.
The Reserve Bank imposed its original limits on mortgage lending with deposits of less than 20 percent in October 2013, which was seen as initially taking the heat out of the market. Since then, house prices have picked up as strong inbound net migration and a lack of supply in Auckland have been exacerbated by relatively low interest rates.
Early Reserve Bank data suggests investors make greater use of interest-only loans, which might partly reflect their ability to offset mortgage expenses against income tax, and those loans are likely to be more highly geared than owner-occupier mortgages.
“The risks associated with investor lending are likely to be greatest in the Auckland region,” the bank said in its report. “Rapid house price appreciation in Auckland has compressed rental yields, and this is likely increasing income gearing among Auckland investors.”
Rental yields in Auckland are running at historic lows, and Wheeler said that suggests "that a lot of investor activity in Auckland is being taken with an expectation of capital gain" and had been a factor in driving up prices.
Deputy governor Grant Spencer last month urged the government the have another look at a capital gain tax on investment housing in a speech to the Rotorua Chamber of Commerce. Wheeler today said the level of highly leveraged investor loans was an opportunity to give the matter fresh consideration, but ultimately tax policy was the realm of the government.
Rising imbalances in the housing market increase the risk of a sharp drop in house prices which would put borrowers under stress and could ultimately flow into the banks through increased losses on housing loans, the report said.
ASB Bank chief economist Nick Tuffley said the new measures announced today will help the Reserve Bank contain financial stability risks it sees around the Auckland property market, and reinforces expectations Wheeler will cut the 3.5 percent official cash rate sooner rather than later.
To facilitate the new LVR lending restrictions, the Reserve Bank will also introduce a new asset class covering property investors, defined as any mortgage secured on a home that is not an owner-occupier. The bank has been in talks with private lenders to agree on a definition, which would then require lenders to hold more capital against those loans.
To recognise more subdued housing markets outside Auckland, the Reserve Bank will ease the restrictions on high-LVR lending for all residential lending to 15 percent from the existing 10 percent. For Auckland owner-occupiers the 10 percent speed limit will stay in place .
The new restrictions on Auckland lending won’t apply to mortgages to build new houses or apartments.
The Reserve Bank will issue a consultation paper later this month seeking feedback on the new proposals.
The Reserve Bank considered New Zealand’s financial system was still sound in the latest report, with lenders’ capital and liquidity buffers increasing in recent years and bank profitability improving with fewer impaired assets ad growth in net interest income.
Lenders have told the Reserve Bank they plan to use new capital instruments allowed under Basel III, and the RBNZ plans to undertake a review of current capital requirements to see how the global and domestic context has changed in recent years.