15 May 2015
Taking a stand on property investment
Written by Benje Patterson, Senior Economist at Infometrics Ltd
The Reserve Bank has launched an offensive against property investors in Auckland. By October this year, lending
restrictions will increase for Auckland-based investors as the Bank attempts to slow the concentration of financial
market risks stemming from property investment into our biggest city. The targeting of investors in Auckland comes
following extensive consultation and research by the Reserve Bank.
The Bank has concluded that although investors only account for about one third of new mortgage lending, international
evidence shows that investor lending is riskier because default rates for investors are significantly higher than for
owner-occupiers during severe downturns. Furthermore, data from CoreLogic suggests that these risks are relatively
concentrated on the Auckland region as investors in Auckland are more likely to use mortgage financing than investors
around the rest of the country.
It is feared that Auckland investors are becoming too highly geared, relative to rental yields, and are too reliant on
expectations of strong future capital yields to ultimately gain a return. This situation leaves some Auckland property
investors in a vulnerable position if there is a sharp correction to house prices. Against this backdrop, the Reserve
Bank has proposed new policy measures to slow a further concentration of financial risks on investors and to dampen
expectations of future capital gains.
The Reserve Bank has announced that all property investors in Auckland will be required to have at least a 30% deposit.
In contrast, when lending to owner-occupiers in Auckland, retail banks will continue to be allowed to issue up to10% of
new loans to owner-occupiers with less than a 20% deposit.
In addition to this explicit targeting of Auckland property investors, the Bank has acknowledged that housing market
pressures around the rest of the country are generally subdued. As a result, the Bank has lifted the speed limit on low
deposit (<20% deposit) lending outside of Auckland from 10% to 15% of new mortgages, irrespective of whether the buyer is an
investor or owner-occupier.
If confirmed, the Reserve Bank’s new policy measures won’t be introduced until October 1. In the meantime, there will be
a flurry or home buying interest by investors seeking to get into the market before the new regulations take effect. But
the effects of this demand on Auckland house prices through the winter will still ultimately depend on how retail banks
respond during the consultation period.
If the banks continue to take a business-as-usual approach to mortgage lending then the flurry of buying activity by
investors before the new regulations take effect could see a temporary spike in house price inflation through the
winter. If instead, retail banks decide to take a conservative approach and act in the spirit of the Reserve Bank’s new
policy measures by immediately beginning to restrict lending to investors, house price inflation could show some signs
of slowing straight away. On the balance of probabilities, this conservative response by retail banks is most likely, as
the banks will be eager to ward off the risk of stricter and costlier policy intervention by the Reserve Bank down the
track.
Although the Bank’s inspiration for wanting such a finely targeted policy response has some merit, we are dubious as to
the practicalities of implementing these measures in a real world setting. When money is at stake, people have a
tendency to find their way around policies that are not uniformly applied.
In the current context, it does not take much of a stretch to envisage an undermining of the policy’s effectiveness by
investors pulling together a 30% deposit for an Auckland property investment by extracting equity from investments in
other parts of the country. Moreover, other parts of the country, especially the lower reaches of Northland and parts of
Waikato may face a wave of property investors seeking opportunities just outside of the Auckland region’s geographical
boundaries where lending conditions are more relaxed.
To cut a long story short, although we applaud the Reserve Bank from taking a stand as part of its financial stability
mandate, we do not agree with the proposed approach to solve the concentration of housing investment risks in the
banking sector. Purporting to have false accuracy by finely tuning relatively untested policies seems like a complicated
way for the Reserve Bank to achieve a simple goal. If the Bank really wants to protect the financial system from these
risks, then a less convoluted approach would be to directly increase the amount of capital that banks’ must hold on
their balance sheet to cover their residential investment property loan book. Not surprisingly, the chorus of support
for this approach among economists is rather quiet, given that most regular commentators work for the banks themselves.
Ends