Residential property investors may soon face tougher capital adequacy requirements in borrowing money. In its 5 March 2015 consultation paper, the Reserve Bank proposes to treat residential property investors as a separate asset class to owner-occupier mortgage holders (see here), and seeks submissions regarding the definition of such a group.
Residential property mortgages currently fall within the same retail asset class, whether for rental or owner-occupied properties. Risk profiles for these groups, however, tend to be quite different. Overseas evidence indicates that property investors pose a higher risk of default – in the Irish housing downturn, loss rates for investors were almost double those of owner-occupiers. The new categorisation would allow the Reserve Bank to more accurately measure risk for retail property investors and create capital allocation rules accordingly.
This is the Reserve Bank’s latest reaction to the current housing issues in New Zealand. The asset class amendment gives more control to the Reserve Bank to implement targeted macro-prudential policies if necessary. However, some doubt the effectiveness of this action. The Property Institute of New Zealand’s chief executive Ashley Church commented that, “in the unlikely event that [the Reserve Bank Governor’s] proposed initiatives are actually successful, all he’d have achieved is to make the current housing problem even worse by scaring away the very people who are all prepared to invest in new housing stock” (see here). Unsurprisingly, NZ Property Investors Federation is also vocal in resisting the change, arguing that rental prices will only be pushed higher (see here).
With the new restrictions aimed to take effect from 1 July 2015 and all lending reclassified by 1 April 2016, it will certainly be interesting to see how this affects residential financing in the coming years.