Bernard Hickey: Investor landlords need curbing

Rental owners buy the most property in Auckland. Photo / Michael Craig

It's time the Reserve Bank found a way to rein in New Zealand's biggest landlords. It's true the high loan-to-value ratio "speed limit" imposed in October last year cramped their style, but it restricted first-home buyers even more.

Now brokers are reporting the fixed mortgage rate reductions of as much as 50 basis points in the past month have fired up the investor market again.

The election removing the prospect of a capital gains tax for the foreseeable future was the final green light. The record sums for single-level brick-and-tile units in suburbs like One Tree Hill are no accident.

The 30 to 40 per cent price increase in many Auckland suburbs since the last rating valuation has built up the equity rental property needed to get back on the leverage wagon.

NZ Institute of Economic Research (NZIER) analysis of CoreLogic data published in July found 45 per cent of buyers this year were rental property investors, 28 per cent were owner-occupiers moving into another home and just 19 per cent were first-home buyers.

This surge in rental investor borrowing in Auckland is often happening through mortgage brokers because investors tend to use brokers more aggressively to get the best deal.

In "normal" inflationary times the Reserve Bank would put up interest rates to cool the market or, more usually, wholesale rates would rise naturally. But our inflation and interest rates are far from normal.

The Reserve Bank couldn't use its interest rate tool last year because of low inflation and the high dollar, which prompted it to invent its high LVR speed limit.

This aimed to reduce risks to the financial system of too much highly leveraged lending in a housing market that international experts judge to be anything from 20 to 40 per cent over-valued.

This year the Reserve Bank put its Official Cash Rate up to slow inflationary pressures.

Unfortunately, annual inflation has been surprisingly subdued at just 1 per cent in the September quarter. This forced the Reserve Bank last month to pause its rate-hiking plans and some economists are even suggesting a cut next year.

The Reserve Bank is expected to update everyone on the future of the high LVR speed limit at its half yearly Financial Stability Report on November 12.

The limit was supposed to be temporary. The bank has previously indicated it could be eased towards the end of this year.

But there are few signs finance companies, which are exempt from the rules, are getting around the speed limit to corrode its effectiveness, as some had feared.

That gives the bank the option of leaving the limit in place until well into next year to keep at least a small rein on the investors.

But it could do more. Last year the Reserve Bank proposed a rule to force banks to put aside more capital to back loans to rental investors with more than five properties.

It was initially delayed until December so banks could work out how to comply with the rule. They argued it would be difficult to know which investors had more than five properties, and that such a rule would increase costs for borrowers.

This week, the Reserve Bank quietly delayed implementing the rule again until the first half of next year while it did more work with bankers to make it practical.

The regulator should keep pressing to get this control in place before the heat simmering in the Auckland market fires up again. The rest of New Zealand already can't afford to keep paying Auckland interest rates and coping with an Auckland-powered currency.

The humble brick-and-tile units in Greenlane, One Tree Hill and Onehunga look set to be the Reserve Bank's and the economy's next nemesis unless it can rein in the investors.