RBNZ targets Auckland landlords

The Reserve Bank of New Zealand has refocused its restrictions on high loan to value ratio mortgage lending to target Auckland rental property investors as it grapples with the financial risks of annual house price inflation nearing 20 per cent.

Despite two years of arguing against regional targeting of its across-the-board restrictions on all types of high LVR lending, the Reserve Bank announced an effective ban on new mortgages to Auckland investors buying existing properties with an LVR of more than 70 per cent from October 1.

Investors buying new houses or apartments off the plan were exempted in the policy changes announced on Wednesday with the release of the bank's half yearly Financial Stability Report.

The bank's existing policy was launched in October 2013. It limited new mortgages with an LVR of more than 80 per cent to ten per cent of all new mortgages, but it was applied to all types of borrowers and in all locations in an attempt to avoid interfering too much in bank lending policies or pricing.

After some initial success in slowing house price inflation through late 2013 and into mid-2014, the LVR policy has proved ineffective in slowing house price inflation in Auckland through late 2014 and into early 2015 as foreign buying intensified, fixed mortgage rates fell, net migration surged and talk of a capital gains tax ended with the re-election of the current Government in September.

The bank's previous LVR policy was also politically controversial as property investors with much more equity from previous house price inflation were better able to deal with restrictions on high LVR loans than first-home buyers. Areas of rural and provincial New Zealand were also hit hard by the restrictions, despite their house price inflation being weaker than Auckland's, or non-existent.

The bank's dramatic shift in the policy follows a sharp rise in Auckland house prices since September last year and a surge in rental property investors buying in New Zealand's largest and most internationally-exposed city. New Zealand has no restrictions on foreign buying, no capital gains tax and no stamp duties.

The bank also announced an easing of the existing 'speed limit' for high LVR loans outside of Auckland, increasing the permitted percentage of high LVR loans to 15 per cent of new lending. The current ten per cent speed limit for owner-occupiers in Auckland remains in place.

"The objective of the policy is to promote financial stability by reducing the rate of the increase in Auckland house prices and improving the resilience of the banking system to a potential downturn in the Auckland housing market," Reserve Bank Governor Graeme Wheeler told a Parliamentary select committee after the announcement of the changes.

"We believe the measures will have a significant impact. Around half of investor lending takes place at LVRs greater than 70 per cent," Wheeler said.

The Reserve Bank said its modelling had found the new restrictions on Auckland landlords were likely to reduce Auckland's annual house price inflation rate by two to four percentage points, albeit down from a high base of 16.9 per cent in March. It also expected house sales volumes to fall eight to ten per cent.

The bank said it expected banks to comply with the spirit of the new restrictions in the interim period before it applies from October 1. The bank said it also planned to increase capital requirements for investor loans from October 1 for new lending, with a further nine-month phase-in after that for existing loans.

Deputy Governor Grant Spencer said the bank would release a more detailed consultation paper on the new LVR restrictions in late May, which would look at issues such as whether holiday homes would be counted as investment properties if rented out for parts of the year.

Elsewhere in the FSR, the bank warned it was watching the risks of high lending to dairy farmers. Milk payouts slumped this year and are expected to remain below long term averages next year.

"Many highly leveraged farms are facing negative cash-flows, and the risks will become more pronounced if low milk prices persist beyond the current season," Wheeler said.

He said around 11 per cent of New Zealand's NZ$34 billion of dairy debt was held by farmers currently experiencing negative cashflows and high LVRs.