WeRent note: Below is an excerpt from this article about Reserve Bank policy changes which could flow on to have major consequences for investors with large portfolios. I recommend you read the full article if you have 5 or more dwellings.
By David Hargreaves
But, credit where it is due, a lot of the latest proposals look like good commonsense ‘belts and braces’ measures that will force the banks to be prudent.
Now, banks will always say they are prudent. But history suggests they can and do get carried away at times of asset bubbles.
The key points in the consultation paper are contained in this article by Gareth Vaughan, so I won’t reiterate them in detail. What I will do is add some hopefully constructive views on the main issues, which I subjectively identify to be:
- A proposal that the big four banks are treated the same way as the smaller banks in that all credit – including personal loans and credit cards – that is secured against a house, be included in the LVR calculations.
- The move that all banks be treated the same, in that they will all be required, as opposed to just presumed, to have a property valuation policy and that this policy is not affected by market conditions.
- That the banks provide details on how they account for such situations as borrowers with more than one property secured, or indeed where there are multiple borrowers with multiple properties.
- That mortgages where the borrower owns more than four residential properties are treated as commercial loans, and likewise in some circumstances borrowing on lifestyle blocks may also be treated as commercial loans. This would make a substantial difference in the “risk weighting” given to the loans.
I like the information gathering that is implied by particularly the third point. It will indeed be most useful for the RBNZ to not only know how banks account for such lending, but how many loans are affected.
There may well be considerable work involved at bank level in giving this information, but it should be worth it.
Why not before?
Hindsight is a splendid thing, but you do wonder why such information has not been gathered before. Although, I suppose the RBNZ might argue that it is now gathering this information in order to apply a new policy – IE the LVR limits – and previously it might have been seen as a waste of taxpayers’ money if the information was not seen as serving a specific purpose.
But for me, I think the more information we have on the inside of the NZ housing market the better.
A lot of the talk on the heated Auckland market focuses around the shortage of supply – but there is no really good information on just who is buying, why and how they finance their purchases. Better understanding of what makes the house market tick is vital.
In the same vein it will also be very useful for the RBNZ to be gathering information on how many people are property investors and how many properties people are owning.
To me it makes abundant sense that anybody owning as many as five houses is in fact a professional investor and therefore should have their loan or loans treated as commercial loans. That should have two significant impacts.
First, of course the different tagging of the loan makes a huge difference to the “risk weighting” applied to the loan as an asset and therefore implicitly on how much capital the banks need to hold. At the moment the “risk weighting” given to the big banks on mortgages is only about 33% and around 38% for other banks such as Kiwibank.
With commercial loans of course, 100% of the loan is included in banks’ capital adequacy ratios. So, quite a difference.
The second point is, what will the re-tagging of the loans as commercial from residential mortgages do to the cost of funding for investors? Potentially, quite a lot, you would have thought.
Of course, it is to be presumed if this change goes ahead that we can expect to see the wives (in their own names) and children (in their own names) and cousins etc of people who own five or more houses suddenly taking ownership of properties. So, this is one area in which there may be those dreaded unintended consequences. Whether the RBNZ has some grand plan to avoid that, time will tell.