Reserve Bank comes up with new definition for property investors

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Property investors are the target of a new Reserve Bank lending restriction, but the bank says it’s not a macro-prudential tool.

Thursday, March 5th 2015, 3:01PM 6 Comments

The central bank says it is consulting on “a new asset class treatment for mortgage loans to residential property investors within its capital adequacy requirements.”

It plans to amend existing rules by requiring all locally incorporated banks to include residential property investment mortgage loans in a specific asset sub-class, and hold appropriate regulatory capital for those loans.

While it doesn’t talk about the impact on investors of the proposed new rule it is likely to mean interest rates for investors will rise above those of standard residential, owner-occupied homes.

Previously the Reserve Bank argued property investors were those with five or more investments. However, the trading banks opposed this definition.

Now the bank is now consulting on three possible alternative ways to define loans to residential property investors:

• if the mortgaged property is not owner-occupied; or
• if servicing of the mortgage loan is primarily reliant on rental income; or
• if servicing of the mortgage loan is at all reliant on rental income.

“International evidence suggests that default rates and loss rates experienced during sharp housing market downturns tend to be higher for residential property investment loans than for loans to owner occupiers,” Reserve Bank Head of Prudential Supervision Toby Fiennes said in a statement.

“The proposal would bring the Reserve Bank’s framework more into line with the international Basel standards for bank capital. The proposed rule amendment is designed to ensure that banks hold adequate capital for the risks that they face from investment property lending.”

Tags: Mortgage Rates property investment RBNZ

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