Although there are warnings on both sides of the Tasman about the implications of the growth in lending for residential investment, ratings agency Standard & Poor’s says the evidence shows that loans to investors are no more risky than loans to owner-occupiers.
While its comments relate to the Australian market, the environment in New Zealand is very similar.
"There has been a great deal of hype recently regarding the growth in lending for residential investment and the impact that it may have on the Australian economy, the level of household debt, the performance of residential property markets and the quality of bank balance sheets," S&P says.
And like our own Reserve Bank governor Alan Bollard, the Reserve Bank of Australia has issued repeated warnings to borrowers not to over-extend themselves on housing. Where Bollard has so far raised interest rates only once, the RBA has hiked its key interest rate twice in recent months.
S&P says it is an established fact in Australia that investment loans are increasing as a proportion of total housing lending. But the experience of most lenders and lenders mortgage insurers is that investment loans have outperformed owner-occupied housing loans.
"Loans to investors tend to have a slightly lower default probability than loans to owner occupiers," it says. Where there are defaults, the loss tends to be less severe and they tend to recover slightly faster than loans to owner-occupiers.
Those who invest in housing tend to already own an existing property with considerable equity. Rental income also supplements the investor’s income to meet loan repayments. And more often than not, the investor provides their own home as security, placing it at risk so investors are "incentivised to meet their obligations."
And when things do go wrong, an investor is often more prepared to take action to limit the loss rather than try to hang on because they don’t want to lose their own home.
The one exception in S&P’s view is the high-density inner-city apartment market. People investing in this market tend to be speculators "with short-term investment horizons driven by tax advantages and desire to make fast capital gains," it says.
It believes asset values are proving vulnerable and that there will be over-supply issues in the sector.
