Tony Alexander: Changes afoot for investors
What impact will new rules for borrowing have on the property market?
Last week the Minister of Finance sent an instruction to the Reserve Bank telling them that from March 1 they must take into account the Government’s goals on house price stability and affordability for first-home buyers when making their decisions, and state what impact their decisions will in fact have on housing.
This expands the targets which the Reserve Bank has to try and hit — but with a limited range of weapons. Specifically, the Reserve Bank has to achieve low inflation, high employment, stability in output, interest rates, and exchange rates, financial system stability and soundness; and now housing goals.
At this stage the Bank has mainly just three tools for doing this. It can change interest rates via the official cash rate, change LVRs, and change rules regarding bank capital and funding levels. With house prices rising strongly and data showing 30 per cent of house sales in January were to investors, the Bank is not delivering the housing market performance the Government wants.
So, what will they change to flatten prices and shift availability away from investors towards first-home buyers?
Already the minimum deposit for investor buyers getting their funds from a registered bank has risen to 40 per cent for new applications, and from May 1 all those with pre-approvals will also need 40 per cent. If housing remains robust heading into winter, a lift to 50 per cent cannot be ruled out — then 60 per cent if needed, though that is not likely.
Whether the deposit rule shifts or not the scene is set for borrowers to move away from getting funds from banks, towards non-bank lenders, trust funds and traditional communities that have long had their own financial systems. Will the Reserve Bank raise interest rates? After all, record low mortgage rates and term deposit rates explain why investors have dived into housing assets (and shares, cryptocurrencies and commercial property) since mid-2020. No.
Interest rates will still be set to influence the overall inflation rate and growth in the economy — not the housing market. On that note though, home buyers and owners should be aware that bank costs for funding fixed rate mortgages have soared in recent weeks as the world outlook improves, worries about a post-pandemic surge in inflation escalate, and markets bet on central banks having to raise rates from next year and not the promised 2024. Increases in fixed mortgage rates are likely soon, and as ever I personally remain a fan of the five-year fixed rate at 2.99 per cent.
The Reserve Bank could easily tweak the level of capital banks must hold for lending to investors, so that investors end up paying higher interest rates than owner occupiers. But they are also likely to consider a couple of other tools to achieve the Government’s goals.
The Finance Minister has specifically asked the Reserve Bank to give him advice on how to curtail interest-only lending to investors, and how to apply a Debt to Income (DTI) set of rules only on investors — not owner occupiers.
It seems quite likely that the days of high levels of interestonly lending to investors are going to end. To prepare for this investors need to start planning for how to start making principal repayments, just in case the rule when it comes is imposed on existing borrowers and not just new ones.
With regard to DTIs, the Reserve Bank has sought power to impose such rules in the past, but each time has been refused ability to use them by the minister. But their day may have come. From 2022 investors may find the amount they can borrow across their portfolio restricted by the level of income they enjoy from all sources.
Will these measures have an impact? Yes. It’s just a matter over what time period. Will they cause house prices to fall? Almost certainly not. Neither the Reserve Bank nor the minister wants the recovery in growth threatened by people seeing their main asset fall in price. Plus, late last year the Prime Minister noted there are more votes in house prices going up than down.
Also, because a lot of new construction of dwellings is financed by investors, no actions will be taken that will put this source of growth in new house supply at risk.
The scene is set for borrowers to move towards non-bank lenders, trust funds and traditional communities that have long had their own financial systems.