The consequences of tighter mortgage lending rules


The Reserve Bank is downplaying criticism its new restrictions on property lending could lead to rent increases or shut first time buyers out of the market.

From September 1st most loans to property investors across New Zealand will require a deposit of 40 percent. Those with a deposit of less than 40 percent will be limited to five percent of a bank's total new lending.

The Reserve Bank (RBNZ) estimates that the tighter rules will dampen house price inflation by between two to five percent.

That does not mean that the average or median price will fall by two to five percent over the next 12 months, rather it means that prices will be two to five percent lower than they otherwise would be if the new rules were not introduced.

The Reserve Bank does not think its lending rules will single-handedly create affordable property prices. What it is trying to do is reduce the risk of a property market crash. It says the evidence from offshore shows that in a crash it is the investors who have the highest default rates.

That is why it is trying to curb lending to investors.

The RBNZ expects a drop of 5-15 percent in property sales as a result of the new measures.

Property investors have raised concerns the new rules will lead to a rise in rents. That is one of several potential "unintended consequences" that the Reserve Bank has considered in a consultation document that it has issued.

The Reserve Bank says the impact on property purchases is likely to be concentrated among investors. The higher deposit requirements are expected to lower demand from investors.

However the RBNZ concedes there is a potential impact on purchases by owner-occupiers, particularly outside Auckland.

But again it believes the impact will be small.

Economist Dr Ganesh Nana agrees the decision will make it difficult for first home buyers.

“The 20 percent deposit will make it harder across the board for all New Zealanders who want to get into their first home. Over the long term by taking investors out of the market, it should, with a bit of luck, bring house prices down or at least stop them growing so fast.”

“That might make it easier over the long haul for first home buyers to get in but again that’s probably drawing a long bow.”

He says the Government needs to do more.

“The thing in terms of first home buyers is really some effort on government in terms of building houses, building houses, building houses. That’s the guts of it.”

“All of those things we are talking about…require political will to actually re-balance the housing market to be in favour of home buyers not house buyers."

The Reserve Bank says first-home buyers that meet the relevant criteria can undertake high loan-to-value-ratio lending via the Government's Welcome Home Loan scheme. The scheme is exempt from the LVR policy.

The RBNZ says mortgage lending for newly constructed houses is exempt from the new policy. That exemption applies both to property investors and to owner-occupiers.

The Reserve Bank says the impact on rents should be "small".

It says it is possible there will be some reduction in the supply of rental property, as part of a shift from investors to owner-occupiers.

 "There could be some upward pressure on rents if this transition results in fewer people occupying each dwelling, but any effect is not expected to be large."

That is because the RBNZ believes any rise in purchases by owner-occupiers should be offset by a reduction in demand by people who want to rent.

At the same time, housing supply should continue to increase.

As mentioned above mortgage lending for newly constructed houses is exempt from the RBNZ's restrictions on low deposit loans.

The Reserve Bank says another risk is that there could be increased lending by institutions that do not have to follow the new lending rules. That would be institutions that are not registered as banks.

The RBNZ says if there was a rise of non-bank lending it could undermine the stability of the financial system.

The Reserve Bank says that so far there doesn't seem to have been much of a rise in lending by non-bank institutions. That is partly because even under the tighter lending rules the traditional banks do have some ability to offer low-deposit loans.

But the RBNZ is watching closely for any sign that an increased share of properties are being financed outside of the banking system.