The Reserve Bank of New Zealand is likely to ask banks to include property investment loans in a specific asset sub-class category, and hold appropriate regulatory capital against them, to safeguard banks in case these borrowers default due to a housing market crash.
The bank has invited views by April 7 on how to define a property investment loan: whether it would apply to investors not living on the mortgaged property, and whether it would apply if loan-repayments are reliant on rents.
“International evidence suggests that default rates and loss rates experienced during sharp housing market downturns tend to be higher for residential property investment loans than for loans to owner occupiers," said Toby Fiennes, Reserve Bank head of prudential supervision.
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"The proposal would bring the Reserve Bank’s framework more into line with the international Basel standards for bank capital. The proposed rule amendment is designed to ensure that banks hold adequate capital for the risks that they face from investment property lending."
Home prices are rising steeply in New Zealand, particular in Auckland, despite cooling measures. Rising home prices prompted the Reserve Bank of New Zealand to introduce loan-to-value ratio restrictions in October, 2013. Banks may only issue 10% of new residential loans to customers with loan to value ratios of more than 80%, i.e., generally customers should deposit at least 20% of the home’s value.
This article was republished with permission from Global Property Guide.