Beating up investors with yet more regulations

Why? Independent economist Tony Alexander says if they do the Government will conclude its efforts to make housing more affordable have failed.

And it will then look for some other way to dissuade investors from buying and encourage them to sell.

Some of the blame has to be placed at the Reserve Bank’s door as it says its house price forecasts have been consistently wrong over the past decade because immigration has been higher than expected and interest rates lower than expected.

“Since 2010, on average our forecasts for annual house price inflation one year in the future have been out by 5.2 percentage points (‘mean absolute deviation’),” the RBNZ says in a report prepared for Parliament’s Finance and Expenditure Committee.

“Excluding the Covid-19 period, the same metric is 3.9 percentage points.

“Over the past decade, the key drivers of this deviation have been that migration has tended to turn out higher than forecast, and mortgage interest rates have tended to be lower than our forecasts would imply.

“Both these factors have contributed to house price inflation tending to turn out higher than anticipated over this period.”

Alexander says the Reserve Bank’s first port of call will probably be to remove the ability to deduct other expenses from rental income for tax purposes – perhaps all expenses.

“This would be fairly radical – but then so too is removing the ability to deduct interest as a business expense.”

He says there are, however, other ways in which investors might be negatively affected by new developments.

Finance Minister Grant Robertson and the Reserve Bank have signed this week a new memorandum of understanding regarding macro-prudential policy.

This involves policies the Reserve Bank can implement which will influence bank lending.

Alexander says they include things such as limits on lending as a proportion of core funding from domestic and long-term stable sources, minimum requirements for the amount of capital needing to be held against certain types of lending, and loan-to-value ratios.

The memorandum gives the Reserve Bank a new suite of tools it has called “debt serviceability restrictions”. These tools include but are not limited to the following.

Debt-to-income restrictions (DTIs)

The Reserve Bank will be able to limit the debt a bank can extend to a borrower as a ratio of their income, with that debt being measured maybe as just mortgage debt, maybe as all debt.

In Ireland this ratio is 3.25 times income and in Britain it is 4.25 times income.

Debt servicing-to-income restrictions

The Reserve Bank will be able to force banks to cap the proportion of a borrower’s income which can be allocated to servicing debt.

Banks usually use 30% or thereabouts. The Reserve Bank might make them use something lower like 25%.

Interest rate floors

The Reserve Bank will be able to specify the minimum interest rates banks must use when calculating debt servicing ability.

For instance, a bank might lend at 4%, but the Reserve Bank may require they work out debt servicing costs using an 8% interest rate.

Alexander says for the moment the bank may not feel it is necessary to use any of these tools. And DTIs may be some way off as the banks need to do some work with their systems and start consultation. 

“But monthly debt data continue to show high growth in housing debt of about $3 billion a month.

“The rate of growth in housing debt over the past year has been 11.9% compared with 6.2% one year ago, 6.2% two years ago, and 5.7% three years ago.

“The pace of growth is the highest since early-2008.”

The memorandum, says Alexander, explicitly states the Reserve Bank must implement its macro-prudential policy according to the direction issued by the Finance Minister on February 25: “The Government’s policy is to support more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.”

“What does all of this mean? To support more sustainable house prices the Reserve Bank is being instructed by the Finance Minister to further restrict access to borrowing by investors,” Alexander says.

“The chances are high the Reserve Bank will utilise its new instruments in the next 12 months focused exclusively, if possible, on investors.

“The Reserve Bank may tolerate an impact on owner-occupiers generally but will seek to limit any impact on first home buyers beyond that already set to come now from restricting the lending banks can do to borrowers with less than a 20% deposit.”

Ghost houses

There is another aspect of this to consider, says Alexander.

The Government, and most people, are concerned about the lack of availability of accommodation for many people across New Zealand.

“When that discussion comes up it sometimes goes down a particular path. What about all the empty houses sitting around the country?

“People might throw into the conversation a guess as to how many there are. Then they will throw in a few guesses as to why they are sitting empty with a frequent conclusion that perhaps people are simply land-banking with a structure happening to sit on the land.”

Ultimately, when it comes to understanding why so many houses sit unoccupied in New Zealand it’s just down to guesses, he says.

“That is something which needs to change.

“Why? Because if the Government decides to move beyond trying to contain house price inflation towards ‘encouraging’ those holding empty houses to put them on the market for sale or rent, owners may not like the outcome.”

Wise Group want to make sure that if and when the debate about empty homes picks up, there is some solid information to hand which will allow proper discussion and potential good policy formation.

The group is conducting an independent feasibility study into the issue of empty homes across New Zealand.

Alexander is urging investors to complete the survey regarding, in simple terms, why a property they own which is empty is sitting that way.

“This way, if the Government does start thinking about the issue of empty homes, it doesn’t make some simple assumptions regarding why they are empty, as they have done regarding the motivations behind Kiwis investing in property over the past three decades.”