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The Reserve Bank of New Zealand (RBNZ) has announced that lenders will now need to hold more capital against investment loans, just weeks after tightening investor LVRs for Auckland.
The RBNZ proposed that the new classification and capital requirements apply to new housing loans starting on 1 October 2015, and loans originated before that date be re-classified under the new definition by 1 October 2016.
The RBNZ will accept comments from the market until 19 June, but the proposal needs no further approvals for it to take effect.
The Reserve Bank of Australia warned lenders in July last year that they may need to hold additional capital against housing finance.
The Financial System Inquiry also recommended that Australian banks hold additional capital.
A recent Moody’s report said New Zealand’s new rules will strengthen banks’ capital buffers for investor loans, which are viewed as more risky than owner-occupied loans.
“Moody’s expects the increased capital requirement to incentivise banks to strengthen their loan underwriting criteria and/or to increase loan pricing, because the higher capital requirements will weaken the economics of lending to residential property investors,” the report said.
“The increase also has positive credit implications for the banks’ risk-adjusted returns and New Zealand’s covered bond programmes, which are affected by bank credit quality.”
Moody’s said New Zealand’s four major banks would benefit from the increased capital requirement given their large residential mortgage portfolios that, on average, make up over half of their total loans.
“The RBNZ stated that the estimates banks provided indicated that investment loans make up approximately 25 per cent of housing loans system wide, which suggests that such loans make up 10 to 20 per cent of total loans for the four major banks,” the report said.