The Reserve Bank has been out consulting, I think for the third time, on proposals to differentiate clearly, in bank capital requirements, between loans for investment properties, and loans to owner-occupiers. I made a fairly short high-level submission on their consultation document. It is here:
housing consultation document 13 April 2015
The thrust of my argument is “case not proven”. The Bank argues that, for otherwise similar borrower/loan characteristics, loans for investment properties are materially more risky than those on owner-occupied properties. But they present surprisingly little data – none from New Zealand, since we’ve had no material housing loan losses since the 1930s – and what data are presented are largely taken as is, with no attempt to think seriously about how the New Zealand investor property market might be similar to, or different from, those in other countries. In particular, the longstanding prevalence of small investors – which arises because our tax system treats them fairly neutrally with other potential holders – is different from countries that often have large corporate holders of residential properties, and perhaps a rush into buy-to-let by individuals very late in the boom.
The Bank is quite open about the fact that its proposals would facilitate the imposition of eg a investor-specific LVR speed limit. That is presented as an advantage, but as they have not consulted on the benefits and pitfalls of such a further intervention – on top of the avowedly temporary initial LVR limit – it cannot be considered as a public benefit at this stage. The latest iteration of the proposals has the feel of something more focused on making an investor speed limit work, than on remedying material deficiencies in the New Zealand bank regulatory capital framework. New Zealand already has among the very highest risk weights on housing loans of any advanced countries and, as the Reserve Bank has recently acknowledged, international experience is that housing mortgages are rarely central to even very serious financial crises.