Banks relieved as RBNZ drops ‘5-plus’ test for home loans

The major banks are breathing a sigh of relief that the Reserve Bank of New Zealand has dropped proposals that would have deemed anyone owning five or more residential properties as a commercial borrower, although the Property Institute is unhappy with the latest proposals, published yesterday for consultation.

The central bank intends to require banks to set aside more capital against lending on homes that are not owner-occupied, to reflect the greater risk to financial stability of investing in residential property for profit rather than to own a place to live in.

In sharp contrast to its heated objection to the introduction of loan to value ratio lending restrictions on all residential lending in 2013, the Bankers Association is welcoming the proposals, which have dropped earlier plans to target all owners of more than five residential properties and reclassify them as commercial borrowers.

“It’s pretty hard to argue against,” the association’s executive director, Kirk Hope, told BusinessDesk. “When the global push is for more capital (to be held on bank balance sheets), you don’t want to be an outlier for a whole bunch of reasons. These options will be a lot more practical to implement than that original option.”

However, the chief executive of the Property Institute of New Zealand, Ashley Church, attacked the Reserve Bank’s latest move, saying the central bank governor, Graeme Wheeler, should “stop chasing shadows and stick to his knitting.”

“In the unlikely event that Mr Wheeler’s proposed initiatives are actually successful, all he’ll have achieved is to make the current housing stock problem even worse by scaring away the very people who are prepared to invest in new housing stock.”

Auckland’s house price increases were a direct result of under-supply, which central bank lending restrictions could not assist.

Labour finance spokesman Grant Robertson said the proposals were a case of the Reserve Bank having to “clean up National’s housing mess.”

The discussion paper envisages those new restrictions being in place by July 1, with all affected lending reclassified by April 1 next year.  The proposals are a reaction, in part, to the continuation of double digit annual percentage increases in Auckland house prices, which rose at an annual rate of 13 percent in the year to February, according to Quotable Value statistics issued on Tuesday. That compared with a 12 percent rise in the year to January for Auckland houses, and a 6.4 percent national average increase in the February year.

The Bankers Association’s Hope said the global trend towards banks holding greater capital against lending on homes that were not owner-occupied was inescapable.

“There’s an argument around the effectiveness of demand-side tools like LVRs, but the challenge if you don’t do these things, ratings agencies come here, look at things and say ‘OK, well, why are you not doing this when the rest of the world is doing it? Why are your risks different from theirs?'”

The RBNZ paper argues the financial stability benefits of higher capital ratios on residential property investment is demonstrated by the extent of damage to the UK and Irish banking systems after residential property collapsed during the global financial crisis of the late 2000s.

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