You might recently have seen an economist recommending that the Reserve Bank should force banks to charge higher interest rates when they lend to investors financing residential property, than to owner occupiers. The intention is that the extra cost to investors of borrowing to buy would dissuade them from buying and this would free up properties for first home buyers.
Such a policy would have an impact commensurate with how much extra interest was charged. But is this likely to happen? Not really. The Reserve Bank is charged with maintaining stability in the financial system and sector, and one way of doing that is to adjust requirements for how much capital a bank must hold for a loan to reflect the riskiness of that activity.
Interest rates reflect risk
This pricing means that banks have to have more capital to back a loan to the business sector than to housing. This is because banks hardly ever lose money when lending against the security of a residential property, but they do for businesses. This is the case even for property investors. Certainly, some can get over-stretched.
But since the introduction of higher minimum deposit requirements for investors than owner occupiers from 2015 – temporarily suspended since May 1 last year – the riskiness of bank investor lending portfolios has declined. There is also less interest-only lending than used to be the case.
Nonetheless, could the Reserve Bank decide it will help first home buyers by slugging investors regardless of their risk profile? No. They are not charged with social engineering and instead, if the government wants to bias the housing market toward first home buyers and away from investors, it will either have to change its instructions to the Reserve Bank – very unlikely – or make its own adjustments.
In many regards the government has already been quite active in this area
They have extended the brightline test from two years to five years and will probably extend it to seven or ten. Will that make much difference? Not really. Most people invest in property for the long-term, and with interest rates expected to stay at unusually low levels for a long-time, people will have been stretching out their anticipated property-holding period for a purchase since early last year.
The government has changed the Residential Tenancies Act and made it more friendly to tenants. While this is very unlikely to cause a rush of investors to sell, it will nonetheless encourage a small number to consider other assets. A greater number of investors disturbed by the changes are however likely to place their property with a management company so the hassle of avoiding breaking any rules and meeting legal requirements is taken care of for them.
What appears to have already happened as a result of the rule changes is that rents have risen rapidly in the past year because the costs of owning a rental property have gone up. This is forcing more people onto the public housing waiting list with a lot more to come as investors get more selective with regard to who they will rent to from now on.
Could the government do something such as removing the ability to deduct interest expense when calculating net property rental returns? They could, but that is likely to be seen as too strong a move, especially when so many properties are owned by average Kiwis making preparations for their retirement.
The upshot is that while some tinkering is highly likely this year, some sort of instruction to the Reserve Bank to force banks to charge higher interest rates to investors is unlikely.
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