It announced today it plans to create a new loan category for investors.
The Reserve Bank says that, over the next month, it will be consulting on “a new asset class treatment for mortgage loans to residential property investors within its capital adequacy requirements”.
It plans to amend existing rules by requiring all locally-incorporated banks to include residential property investment mortgage loans in a specific asset sub-class, and to hold appropriate regulatory capital for those loans.
The Reserve Bank, which cites international evidence on the higher risk profiles of investors, says the goal of the consultation is to better define what an investment property loan is.
While it has previously proposed defining property investors as those with five or more properties, that suggestion was met with significant opposition.
This time, the Reserve Bank plans to consult on three possible alternative definitions for property investment loans. They are:
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If the mortgaged property is not owner-occupied; or
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If servicing of the mortgage loan is primarily reliant on rental income; or
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If servicing of the mortgage loan is at all reliant on rental income.
Loan Market’s Bruce Patten says the Reserve Bank’s latest approach is a better one.
He believes the Reserve Bank is seeking to get a better understanding of the level of property investment and its place in the property market.
“Based on the available information, I think this is stage one of a data collection plan. They need to gather information before they enact any macro-prudential tools aimed at investors.”
But the issue is what the Reserve Bank might then do once it has collected such information.
Ultimately, it could lead to higher interest rates or servicing limitations for investors, Patten says.
“This could be a cause of concern. If you believe there should be less tinkering with the market, then you would probably take a negative outlook.”
When it comes to individual investors, Patten felt the measure’s impact on the market would have little effect on those with good equity who are well-serviced.
“But for those who are not in such a good position, who are on the borders, it could cut them out of the market.”
ILender’s Jeff Royle says that, in many other countries around the world, there are differentials between home loans and investment property loans.
This means that investment property loans are often more expensive because they are considered to have a commercial aspect and a higher risk profile.
“So if New Zealand does go down that road, it would be following international practice.”
Like Patten, he felt that the Reserve Bank’s move was the first step in a grander plan.
“They clearly want to find out how much of the lending going on in the property market is for home loans and how much is for investment property loans. What will be interesting is what they then decide to do with the information once they have it.”
The Reserve Bank consultation process finishes on April 7. For more information about the consultation, click here.
