The changing face of lending

In recent weeks the banks have tightened up their credit policies and specifically rules around non-residents being able to borrow. The changes came out of nowhere, but in reality the issue that banks have been forced to deal with has been brewing for some time. There is a lack of understanding from the Reserve Bank and Government about how the Asian community operates and how much capital comes to New Zealand via extended family networks.

According to Capgemini there are 4.69 million HNWIs in Asia controlling $16 trillion in assets. There are 900,000 millionaires in China alone (a High Net Worth Individual “HNWI” has investable assets of over US$1m excluding their house). We’ve had plenty of misdirected debate about the extent that non-residents are buying up Auckland.

My view has always been that the focus should be on capital and not on who ends up on the property title.

• The new rule changes prevent non-residents (who are not New Zealand citizens) from borrowing against residential property in New Zealand. They can still buy property, but will find it much harder to get a mortgage.
• Another change, and one I think will have a bigger impact, is the inability for NZ residents to use overseas income in loan applications. To date some recent NZ residents have relied on ‘questionable’ overseas income to pass bank servicing calculations.
• What’s clever about excluding offshore income from mortgage servicing calculations is that the change won’t impact on first home buyers and owner-occupied borrowers. It levels the playing field.
• If the Reserve Bank wants to slow down the housing market, then I think they are headed in the right direction. I like the subtlety of the changes. It’s good to see the Reserve Bank using a rifle instead of a shotgun.
• Up until now the Reserve Bank has used loan-to-value ratios as it’s favoured macro-prudential tool.

However, LVR rules haven’t work. I think because (1) they were used too late and (2) access to equity/capital has never been the issue. They also impacted too heavily on first home buyers.

Another change the Reserve Bank could make is for banks to not include boarder income in loan applications where the applicants own more than one property (i.e. investors). This would tighten servicing specifically for low income investors. Both the foreign income and boarder policies would be considered servicing calculations and so fit under the Reserve Bank’s recent comment that it is looking at debt/income type rules for the housing market. Both effectively reduce the income that banks can use in their calculations. In the short-term the foreign income and non-resident changes are pouring fuel onto the market.

At Squirrel, our foreign buyers are now rushing purchases to utilise their existing approvals before they expire. I’m also seeing NZ residents rushing to buy, nervous that the servicing rules could be tightened further. We should be careful to hold back judgement for 2-3 months. Personally I think the rule changes will work and we’ll see the heat come out of the Auckland market, hopefully in a fairly orderly way.

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