Reserve Bank has released a consultation document on their proposal to separately classify residential rental property loans from owner occupied residential loans. The NZ Property Investors’ Federation has now examined the consultation document and made a submission on the Reserve Bank’s proposal.
The Reserve Bank supports their position that property investor loans are more risky than loans to owner occupiers by quoting two studies into the Irish housing market, which crashed severely in 2007. By separately classifying investor loans, the Reserve Bank is proposing to require lending banks to hold higher levels of capital reserves against these loans.
But do the facts support the Reserve Bank’s case?
NZPIF maintains that estimates made in 2011 of expected losses from loans to property investors for the years 2011 to 2013 rather than research of actual losses have coloured the thinking of the Reserve Bank.
The Reserve Bank has used these estimates to state that “evidence from Ireland suggests that loss rates for investors were nearly twice as high as for owner-occupiers” but these estimates do not prove that investment loans are more risky.
The research papers do say that the Irish investment property loans had lower levels of arrears than owner occupier loans but that the banks were more likely to default rental property loans rather than loans for owner occupiers.
The likelihood that banks are more lenient towards owner occupiers does not prove that loans to investors are more risky.
For all these reasons, the NZPIF is clear that there isn't a good factual basis to require banks to increase capital requirements for these loans.
The NZPIF submission to the Reserve Bank therefore recommends that the Reserve Bank does not proceed with plans to either classify rental property loans or require banks to hold higher capital reserves for such loans. This can only have the potential for costs to increase, lower investment in rental property leading to lower supply and rising rental prices.