Mortgages

RBNZ signals tougher rules for investors

Investors look set to face tighter lending restrictions by the end of the year, the Reserve Bank indicated today.

Thursday, July 07th 2016

Reserve Bank deputy governor Grant Spencer

Reserve Bank deputy governor Grant Spencer told the Wellington branch of the NZ Institute of Valuers that growing imbalances in the housing market require policy action on a number of fronts.

New Zealand’s current housing boom is seeing house prices increasing at 13% per annum nationally and at 15-20% in Auckland and close-by regions, he said.

“Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction.”

The Reserve Bank is concerned that a severe housing correction would pose real risks for financial system stability and the broader economy.

Spencer said the banks are heavily exposed to housing with mortgages making up around 55% of total assets, while household debt, at 163% of household income, is at a record level.

The boom is being fed by multiple factors on both the demand and supply side – including low interest rates, rising credit growth, population increases, and a constrained and inefficient housing supply response.

In the Reserve Bank’s view, it has been exacerbated by New Zealanders’ preference for property investment over financial investments, due to ready credit and a tax system that favours debt-funded capital gains.

Spencer said a dominant feature of the housing resurgence has been an increase in investor activity – with investors accounting for around 43% of Auckland sales and 38% of sales in other regions in recent months.

“The Reserve Bank considers that rising investor participation tends to increase the financial stability risks relating to the household sector in severe downturn conditions.

“Evidence from the UK and Ireland shows mortgage default rates significantly higher for investors (at any given LVR).”

Given the complexity of factors, there is no simple policy solution to the current housing market situation – although boosting the capacity for development of supply is paramount, Spencer said.

The Reserve Bank has no direct influence over supply, but it can influence housing demand through the credit channel and, for this reason, it is looking at macro-prudential tools, he said.

“Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes.

“In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.”

One policy option the Reserve Bank is considering is tighter LVRs.

This would be to counter the growing influence of investor demand in Auckland and other regions, and to further bolster bank balance sheets against fallout from a housing market downturn.

Spencer said that, given the growing housing market pressures across the country, one approach would be to adopt a single national LVR limit for investors.

“Given that the banks have much of the relevant systems work in place, we expect that such a measure could potentially be introduced by the end of the year.”

Another option is a new debt-to-income (DTI) speed limit to complement the LVR requirements by improving the resilience of household balance sheets to income or interest rate shocks, Spencer said.

“A DTI limit would make defaults less likely in a downturn.

“Furthermore, a DTI and LVR in combination would constrain credit growth and house price pressures on a more sustainable basis than would LVRs alone.”

However, a DTI would be a new instrument that would need to be agreed with the Minister of Finance under the Memorandum of Understanding on Macro-prudential Policy.

Adoption would require more analysis and systems preparation than an extended LVR, he said.

“We intend to consult with the banks on the viability of a DTI policy and data issues before making a decision on implementation.”

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