Financial Stability Report Nov 2014 – What was in it for Property Investors?
Update – New Rule: Interest Rate rise for 5 or more rentals
Some of you will be aware that the RBNZ has been looking at introducing new capital requirements which would essentially make a new asset class and would mean banks would have to have more capital for lending to what it considers “professional property investors”. The RBNZ has been dialoguing with the banks but has kept postponing the start date. The latest Financial Stability Report was released mid-November. Following the release Deputy Governor Grant Spencer confirmed that work is still continuing on this proposal. He said that initial consultations had taken place with the banks but they were at odds in their views on how residential property investors should be treated. He confirmed the RBNZ was trying to find in his words the ‘most sensible’ option and that may be different than what was earlier envisaged. There is now some uncertainty as to whether the “5 or more rentals’ rule is appropriate and they may look at adopting an ‘income’ rule.
Banks have been putting up strong arguments against the proposed changes, but despite this they will not be drawn on what the changes mean. We expect that property investors that meet the proposed criteria would become commercial customers, be up for higher interest rates and tougher equity requirements. Apart from that very little detail has been forthcoming. This is a topical issue for investors as recent surveys show that they have been increasing the size of their portfolios. The rational behind the proposal for a new set of rules is that there is more risk involved with this lending, but research shows that generally the equity levels within larger investment portfolios are still prudent.
Continue to watch this space….however for the time being, investors can breathe easy that the ‘5 investment property’ rule is not looking likely to be implemented any time soon.
LVR Restrictions – Not going anywhere anytime soon
There had been high expectations that the RBNZ would move to ease or remove the current LVR restrictions when it released its Financial Stability Report in November. That did not happen. Governor Wheeler has said that house price inflation and housing credit growth had tailed off since the introduction of the LVR’s and the subsequent rise in the official cash rate. Nationally (the individual main centres report differently) house price inflation dropped just over 4% between Sept 2013 and Sept 2014. He felt that there is a risk of house-price inflationary rebound, citing a risk of house price inflation spiking in the face of strong migration inflows. Although we have an increase in building consents there is going to be a big gap between projected housing demand and available supply still for some time to come.
Although we don’t believe the LVR’s have done much at all to dampen the housing market, there is also little urgency to change this until housing supply in Auckland gains some momentum. Statistics do show that first-home buyers have been squeezed a little, showing a small drop in their share of sales. Sales to newby home buyers is sitting just below its 10 year average. Residential property investor activity is constant, currently occupying 40% of the market share, up 5% from a year ago. Again, given how much of the activity in the housing market is investors, its unlikely the LVR restrictions will get traction in their purpose to cool the market. In our view….this has largely been a storm in a teacup.