WELLINGTON: The Reserve Bank of New Zealand (RBNZ) said on Thursday it is looking at requiring banks to hold more capital to back loans to residential property investors, to guard against fallout should there be a housing crash.
The RBNZ is to hold a month-long consultation on how to draw up and implement such a measure, which would include looking at whether it would apply to investors living on the mortgaged property, and whether servicing the loans depended 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 RBNZ head of prudential supervision Toby Fiennes.
The bank has been looking at such a proposal since 2013, but suspended action last year after property investors and banks raised difficulties with its proposal to target controls on borrowers with five or more properties.
"The proposed rule amendment is designed to ensure that banks hold adequate capital for the risks that they face from investment property lending," Fiennes said.
The change would force local banks to hold more cash to back such loans and might raise the cost of borrowing for residential property investors.
RBNZ limits on how much banks can lend to low deposit mortgage borrowers - loan to value ratio lending (LVR) - were imposed in October 2013 and have been credited with helping to slow housing price growth for a time.
Latest property market reports showed growth in prices has started picking up again, especially in the biggest city Auckland, suggesting the impact of the LVR limits is fading.
The RBNZ has renewed its warnings about the housing market getting a second wind, but also indicated there is little prospect of an interest rate rise in the foreseeable future, forcing it to look for alternatives.
"This announcement sets the scene for the RBNZ to deploy even more enhanced macro-prudential tools to cool housing specifically," said TD Securities head of research Annette Beacher.
It may look to tighten the LVR policy by targeting the Auckland region, or require banks to increase the amount of reserves they hold in support of property loans.
The RBNZ issues its six-monthly financial stability report in mid-May which would be an opportunity to extend the current LVR lending restrictions or bring in new measures.
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