RBNZ will target property investment lending
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."
(BusinessDesk)