The housing market continues to look strong in Auckland. The rest of the country is seeing muted or moderate price growth, so a very big tail is wagging the dog.

The latest figures from the Real Estate Institute show national price growth of 6% annually to February, but Auckland price growth at 15%. Nationwide sales turnover lifted nearly 4% over February after a choppy holiday period but that still meant the highest sales turnover in 18 months – putting aside a stunning December.

In March the RBNZ once again stated it has a neutral outlook for interest rates. We don’t see any need for a higher Official Cash Rate for a considerable time and, if anything, the risks to the inflation outlook favour a lower, not higher, OCR. A reasonable threshold still needs to be met, however, to prompt the RBNZ to cut.

The New Zealand economy is doing well overall, even though it is being impacted by the unusually dry conditions in many parts of the country. Even the buoyancy of the Auckland housing market is not seen as an inflation issue and is unlikely to spur a higher OCR. For property investors, the interest rate outlook is going to remain favourable for a little while longer.

Policy Interest

The main driver of higher mortgage rates is likely to be rising US interest rates once the US Federal Reserve starts a gradual process of moving its policy interest rate away from zero.

But that doesn’t mean the property market will be free from the reaches of the RBNZ. The RBNZ is stepping up its efforts to ensure that the financial system is resilient, by pushing ahead with a measure requiring banks to hold more capital against loans for residential property investment.

All bank loans have capital held behind them to meet minimum bank capital requirements set by the RBNZ. But residential property loans tend to have much lower capital requirements as they are generally considered to be less risky than commercial or corporate loans. For one, they have a very tangible real asset sitting behind them as collateral.

Capital Charge

From 2013 the RBNZ had proposed that owners of five or more investment properties would be treated as commercial borrowers – with a consequent capital charge considerably more than what would currently be required for such loans. A challenge of this approach to earmarking a group of property investors was the difficulty in practice of determining exactly how many properties an investor has – and ownership structures were sure to get more opaque in response.

So the RBNZ has gone back to the drawing board. It is consulting on how to define a residential investment loan in a way that is far simpler.

Its options for defining an investment loan are: the mortgage is not for an owner-occupier, or; the loan is primarily dependent on rental income for servicing, or; there is any reliance on rental income for servicing the loan.

Investor Loans

Whichever option is preferred, it will cover a broader number of property investor loans than the initial proposal. But, in contrast, the added capital charge for each loan will be considerably less than under the original proposal, though still higher than what banks currently carry.

The overall impact and cost to banks remains to be seen. If it is modest then it may have little impact on the lending rates for investors, but a substantial cost might get passed on.

These requirements will take effect from mid-year, though banks would have nine months from then to take into account the capital requirements of existing loans.