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National roll-out for investor mortgage lending restrictions fairly straightforward, banks say

Friday 8th July 2016

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The country's banks should find it relatively easy to deal with a national limit on the level of low-equity mortgage lending for investors given they're already in place in Auckland, according to their national lobby group. 

Reserve Bank deputy governor Grant Spencer yesterday highlighted the persistent risk posed to the nation's financial system by the boom in property prices, with housing loans accounting for about 55 percent of lenders' total assets. Investors are seen as the biggest threat because they don't have the same incentive to keep meeting interest repayments as owner-occupiers, who might have to move out of their home if they default on a bill. 

The central bank has come under increasing pressure to do something about the property market due to its mandate for maintaining financial stability, but has ruled out interest rate hikes saying they would drive inflation below the 1-to-3 percent target band over the medium term. 

The bank's other options are to use macroprudential tools such as the loan-to-value ratio limits on residential lending, first introduced in late 2013 in an effort to cool down the housing market. Spencer said the bank could impose a single national LVR ratio limit across the nation, which could be introduced by the end of the year. Another would be to adopt a new debt-to-income limit, which would tie mortgages to salaries, or changing the capital requirements banks need to hold against their books. 

Bankers Association chief executive Karen Scott-Howman said the country's lenders have already got systems, governance and processes in place that would make a national roll-out the existing restrictions for Auckland investors, which requires them to have a deposit of at least 30 percent, easier than the other options touched on by Spencer. 

"It depends on whether it's a nationwide investor limit or an investor limit in Auckland and other targeted limits by regions - the devil will be in the detail," Scott-Howman said. "It's sensible signalling and a prudent approach to making policy."  

Scott-Howman said the proposed debt-to-income ratios would take longer because they need Finance Minister Bill English to add it to the Reserve Bank's macroprudential toolkit, and would then need to go through a consultation process akin to that in 2013 when the LVR restrictions were first introduced. 

In a statement, the Property Institute, which represents commercial and residential property managers, valuers and advisers, warned Spencer's timeframe may spur a flurry of investor activity in the interim, while the Property Investors' Federation said it would only cut rental supply and drive up rental prices.  

Scott-Howman said the banks are already responding to the Reserve Bank's earlier warning it may turn to macroprudential tools to try and quell some of the demand in the housing market and as credit conditions change. 

"The banks are always going through the process of de-risking to cope with market conditions, and are making regular adjustments to their behaviour," she said.

Rapidly increasing house prices have been a headache for policymakers, who are contending with record net inflows of migrants and a shortage of available properties. At the same time, historically low interest rates have fuelled demand in an economy growing faster than most of its peers. 

"The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income," Spencer said. "Residential investors are accounting for an increasing share of house sales and new mortgage credit." 

Auckland Council's unitary plan is seen as a key plank to free up land in the country's biggest city, where rising prices are most acute, though Housing Minister Nick Smith's final national policy statement is also expected to lift supply over time, while the opposition Labour Party is set to announce the other major legs of its housing policy this weekend. 

Spencer yesterday said the policy response needed to be "a team effort", and threw the bank's support behind the introduction of urban development authorities to fast-track planning and consenting progress. He also said the government should review the tax advantages of investing in residential property and whether the country's rapid net inflow of migrants meant migration policy was achieving the appropriate numbers of people with the right skills. 

Prime Minister John Key today reiterated his view that the Reserve Bank should introduce new LVR restrictions sooner rather than later to quell some of the investor demand for property. Housing Minister Nick Smith has previously said he wants to skew the market in favour of first home buyers, though ministers have resisted calls to enact policies that bring down prices, instead preferring a slower pace of increases.

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