by Miriam Bell
Reserve Bank Governor Graeme Wheeler said the RBNZ has been following the Auckland housing market and its dynamics closely.
Given Auckland house price inflation is currently at 17% per annum, there are record low rental yields of around 3%, and that house price to income ratios are up, the RBNZ believes investors are driving a significant amount of the market activity.
“We are worried about the impact of all this on financial stability. We don’t use words like ‘bubble’ but we are seriously concerned about the financial risk posed by the Auckland housing market.”
For this reason, from October 1, the RBNZ will require residential property investors, in Auckland, who are using bank loans to have a deposit of at least 30%.
Consistent with these measures, a new asset class for bank loans to residential property investors will also be established.
Banks will be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending.
The policy is intended to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system in case of a potential downturn in the Auckland housing market.
Wheeler emphasised that the RBNZ believes the main driver for the current condition of the Auckland housing market is the severe shortage of supply and the inability to keep up with the amount of people arriving in the city.
But he said the RBNZ thinks investor activity, driven by capital gain prospects, is exacerbating the situation.
Around 40% of sales in Auckland over the past year were to investors and the RBNZ believes that investors tend to have higher default rates in housing market downturns.
“The situation is a complex issue and there needs to be an approach that addresses the problem on a broad front,” Wheeler continued.
“It is not going to be solved by one policy. There needs to be a range of solutions that look at the supply and demand issues.
“Macro-prudential policy is one solution – tax policy is another… Hence our suggestion that government take a fresh look at the tax preference given to housing, especially where lending is highly leveraged.”
However, he noted that any tax policies were a matter for government.
In order to try and address supply issues, it was important to encourage residential construction activity in Auckland, Reserve Bank Deputy Governor Grant Spencer said.
This means that, consistent with the existing LVR policy, the proposed LVR restrictions will not apply to loans for new build houses or apartments or for off-the-plan purchases.
Wheeler added that the policy will not apply to family baches and holiday homes – as long as they are owner occupied.
“If it is a holiday property for your own use that will be defined as owner occupied. However, if a rental income is derived from the property that could fall into the investor category.”
He said there will be consultation on such situations.
While the policy will take effect on October 1 – to give banks time to make the necessary changes – Wheeler said the RBNZ expected them to honour the spirit of what was being proposed until that time.
He said the RBNZ had been pleased with the approach the banks had adopted when LVR restrictions were introduced in 2013 and expected them to do the same with this policy.
Later this month, the RBNZ will issue a consultation paper seeking feedback on the new proposals. It will also look at possible approaches to mitigate any risks – like people trying to get around the new rules.
But Wheeler said there were no plans for any other policies [relating to the Auckland housing market] at this point.
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