Just before Christmas last year, the NZPIF had a meeting with Reserve Bank officials concerning comments made by the Reserve Bank Governor and their plans to increase the borrowing costs for rental property owners with five or more rental properties.
Regarding house price increases, the Governor was reported as saying "The issue is also around people who invest and buy multiple houses. We have been thinking quite deeply about whether we need to introduce measures to discourage some of those practices and we're currently exploring that in-house."
The officials assured us that the bank has no interest in influencing how many rental properties individual people own. For this reason, and through negative feedback from banks, the Reserve Bank was backing away from their 5+ rental property loan restrictions.
They did, however, state that they were tasked with insuring stability in the financial markets and they believed rental property was at a greater risk than owner occupied property. Their reason was that in the event of an economic downturn, rental property owners were more likely to sell their rentals than their homes.
It was pointed out to them that rental properties and owner occupied properties are sold within the same market, so prices of both would be affected equally. We also pointed out that whether a property was owner occupied or rented out was not a good factor to predict risk.
This reasoning did little good and they confirmed that the Reserve Bank would be doing something to force banks into holding more capital for the perceived extra risk that they saw with rental property loans.
The Bank has now put out a Consultation Paper on asset class treatment of residential property investment loans. The paper is quite long winded and appears to be aimed at banking professionals, but anyone can make a submission. The paper is available at the Reserve Bank website, http://www.rbnz.govt.nz
Their proposals are broadly in two areas. The first is to classify residential investment loans separately from owner occupied loans. The second is to decide if banks should be required to hold higher levels of capital for these loans because they have more risk than owner occupied loans.
The Bank want feedback on three methods to define an investment loan. These are:
1. Any loan other than owner occupiers
2. Any loan that is serviced by rental income
3. Any loan where more than half of the servicing costs are dependent on rental income
Classifying the real purpose of residential loans may be a good idea as it gives a clear picture of what loans are being used for. However if that is the purpose, then loans using home equity to borrow for businesses, shares, farms and other investments should logically also be classified.
There is also the real threat that the true purpose of the proposal is to disencourage rental property investors, and classification is just the first step towards this aim.
There are three main factors that will affect the impact that the changes will have on rental property. The first is how the Reserve Bank will classify a residential investment loan, the second is what level of macro-prudential policies the Bank will apply to residential investment loans and the third is the cost to commercial banks and how they will apply these extra costs.
The NZPIF and Associations will certainly be analysing the situation closely and putting a submission to the Reserve Bank.