Article – BusinessDesk
RBNZ to press ahead with plans to carve out property investment lending
By Paul McBeth
May 29 (BusinessDesk) – The Reserve Bank of New Zealand is pressing ahead with proposals to create a new asset class for lenders,which will let it target Auckland property investors as a means to take the heat out of the market in the country’s biggest city, despite opposition from the majority of submissions.
The central bank will go ahead with plans requiring lenders to carve out borrowing for property investors as an asset class sub-set, requiring higher levels of capital, and defining those borrowers who aren’t owner-occupiers. The bank considers residential property investor loans have a different risk profile that should have more capital held against them, as they have higher gearing than a home-owner’s loan and are more at risk during economic downturns.
The Reserve Bank said the majority of submissions didn’t support its rationale for creating a separate class, arguing that property investor status in and of itself didn’t contribute to the riskiness of a mortgage loan book, a stance the regulator rejected, citing the experience in the UK and Ireland which found buy-to-let borrowers were more likely to be in arrears.
“The Reserve Bank agrees that diversification across income sources may insulate the serviceability of a given loan from economic (ie unemployment) shocks,” it said. “However, at a given LVR (loan-to-value ratio), an investor will have multiple properties in addition to their own home, leading to substantially higher gearing to their income than an owner-occupier with one home at the same LVR.
“If the investor’s debt is dependent on both their labour income and their rental income, they become in effect more exposed to systemic risk as they assume not only their own unemployment risk, but that of their tenants.”
Earlier this month governor Graeme Wheeler announced plans 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. To introduce those macro-prudential tools, the bank needs to complete earlier plans for micro-prudential rules around the sub-class.
At the time, Wheeler said 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.
The bank estimates creating the new sub-class will impose costs ranging between $250,000 and $500,000 for smaller banks, and between $1.3 million and $5 million for larger banks, largely around changes to IT systems, staff training, and introducing new processes for lenders.
“The Reserve Bank understands the practical and technical difficulties that banks may have in changing their systems to comply with the new asset class treatment, given that the final definition had been uncertain until now,” it said. “Accordingly, the classification requirements for new lending will be delayed, to come into effect from the 1st October 2015.”
Existing loans will have a 12 month transition time from that date.
In a regulatory impact statement accompanying today’s summary of submissions and responses, the Reserve Bank said it wasn’t inclined to lower the current calibrations at the moment, but would revisit those in due course.
“The proposed calibration would lead to a capital outcome more commensurate with the high risk profile of these loans,” the RIS said. “A macro-prudential policy could be targeted relatively easily at the loans captured by the new asset class.”