Reserve Bank calls for action aimed at investors

In a speech to the Rotorua Chamber of Commerce today, RBNZ Deputy Governor Grant Spencer provided further evidence that the RBNZ has property investors in its sights.

Spencer pointed to residential property investment as one of the areas that needs to be targeted to deal with the financial and economic risks posed by housing market imbalances, particularly in Auckland.

“Irrespective of the mix of demand and supply-based factors, the longer the excess demand persists, the further prices will depart from their underlying fundamental determinants, and the greater the potential for a disruptive correction.”

Should something trigger a housing market correction – and a downturn – the RBNZ believes the country’s banking system would be put under severe pressure.

This is because 60% of the banks' lending is in residential mortgages.

For this reason, measures should be considered to counter the growth in investor and credit based demand for housing, Spencer said.

The RBNZ would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially housing investment.

“Investors are often setting the marginal market prices that are then applied to the full housing stock within a regional market.

“Indicators point to an increasing presence of investors in the Auckland market and this trend is no doubt being reinforced by the expectation of high rates of return based on untaxed capital gains.”

Another potential instrument to help restrain credit-based demand pressures and improve the resilience of bank balance sheets to a potential housing downturn is macro-prudential policy, he said.

“The introduction of LVRs helped to moderate housing market pressures despite strong net inward migration and the ongoing shortage of housing. They also improved the resilience of bank balance sheets.

“They will be removed or modified as market conditions allow.”

Spencer said that other macro-prudential options are being assessed, including in relation to investor lending. 

“But such tools are not a panacea… Their impact is inevitably smaller than the main drivers of the current housing market imbalance.”

He added that while policies to ease the supply constraints, particularly in Auckland, should be the main priority, they are unlikely to yield quick results.

However, prominent Auckland property investor David Whitburn said that property investment is actually leverage advantaged not tax advantaged – and, while the RBNZ may have views on tax policy, it has no control over it.

“The RBNZ should instead be cutting the Official Cash Rate. But they think this will further stoke the fire of Auckland house prices so they aren't doing it.”

In his view, demand for Auckland property is hard to control as people continue to want to live in Auckland, despite knowing it is far more expensive as a place to live than other parts of New Zealand.

“Strong migration brings tremendous benefits, therefore the focus should be on the supply side of the issue and this may mean measures like removing the costs, rates, delays and uncertainty of property development.”

For example, Whitburn suggested that the Development Contribution (DC) and Watercare Infrastructure Growth Charge (IGC) should be removed or not funded by developers, or that there could be exemptions to DCs and IGCs for affordable housing projects.