One of the Reserve Bank’s core functions is to help maintain financial stability. This is done in part by regulating banks.
The Bank states that their proposed change to rules is to enable loans with similar risk characteristics to be grouped together. They believe that "lending for property investment has a different risk profile than lending to owner-occupiers, and banks therefore need to have a larger amount of capital for their investment property loans than they do for loans to owner occupiers". The Reserve Bank is proposing to define residential rental property loans as different from owner occupied loans and require banks to hold larger amounts of capital for these loans.
While the Reserve Bank says that the reason for the changes is purely risk based, most of their media comments have been around reducing property prices.
The Reserve Bank is basing their decisions on studies of mortgage default rates from Ireland during the severe economic downturn following the Global Financial Crises of 2009.
The NZ Property Investors' Federation (NZPIF) believes that any higher default rates for property investors in these studies are marginal and it is unrealistic to use the extreme economic occurrences of a foreign country to determine risk levels of rental property owners in New Zealand.
In addition, some of the studies use the same term "investors'" which may include property developers and rental property owners.. These two activities have distinctly different risk factors, with developers having greater risks than rental property owners.
The Reserve Bank has attempted to minimise the effect of their policy changes saying that "pricing of loans is a matter for negotiation between borrowers and their banks, and is not regulated by the Reserve Bank". However there is no doubt that any requirements for commercial banks to hold more capital against property investor loans will put pressure on banks to increase the cost of loans and maintain their profit margins.
The NZPIF does not believe that there is a strong case for claiming that rental property loans have more risk than owner occupied loans. If banks are forced to hold extra capital for rental property loans and this increases the cost of borrowing for owners, it is highly likely that this extra cost will result in higher rental prices.
The Reserve Bank uses information from research papers on housing loan defaults in Ireland to make their case that rental property loans in NZ are riskier than owner occupied loans.
The situation in Ireland was extreme however, with a complex series of factors that are unlikely to ever occur in New Zealand. The following Reserve Bank graph shows just how extreme the Irish situation was compared to other countries, including New Zealand.
The papers that the Reserve Bank use to make their case state that "comparison between UK and Irish lending show loans are up to 5 times more likely to default in Ireland". The paper also states that "This reflects the seismic growth in the Irish mortgage market and relaxing of credit standards through the housing price boom, and this can be explained by the more favourable macro conditions in the UK market but puts the credit quality of the Irish book into context".
So rather than saying that financial stability can be addressed by holding more capital against investment property loans, the paper says that credit quality of loans was a key reason for a high level of defaults.
The Reserve Bank states that "evidence from Ireland suggests that loss rates for investors were nearly twice as high as for owner-occupiers". However to make this claim, the Bank has used estimates made in 2011 of expected losses in the years 2011 to 2013 rather than research of actual losses incurred.
The paper also states that the underlying arrears rate was lower on buy-to-let lending than on home-owner lending. They say that "this is unsurprising, as lenders offer extended forbearance to owner-occupiers to help them get through periods of financial difficulty without losing their home".
To summarise, the research uses estimates rather than actual outcomes to claim that rental investor defaults are almost twice that of owner occupiers. However they also say that fewer rental property owners were actually in arrears, but that banks are more likely to default rental property owners than owner occupiers.
The following graph from the UK Council of Mortgage Lenders backs this up. Both Buy-to-Let (The UK term for rental property owners) loan defaults and owner occupied loan defaults increase by similar amounts. The fact that banks are more likely to default BTL loans shows that there is very little difference in risk between the two types of loans.
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