Frank Newman: Regulation risks for property investors

The ANZ Bank and the New Zealand Property Investors’ Federation (NZPIF) have released the findings of their annual property investors’ survey. It’s an interesting insight into the thinking of residential property investors and how that thinking has been shaped by government policy and market conditions. Members of the NZPIF tend to be larger investors who have been in the game for a number of years which is reflected in the results.  1156 property investors took part in the survey.  

The general themes to emerge are:

• Concerns about government regulation,
• Debt reduction, and
• An expectation that property prices will continue to rise.

Government regulation remains the key area of concern for property investors with 52% saying it is their greatest concern, up from 48% last year. In 2010 just 12% rated this as the greatest risk. The main areas of concern are a proposed change to banking regulations by the Reserve Bank, and the introduction of the building warrant of fitness regime for private rental properties.

The Reserve Bank's proposal would require banks to treat loans to residential property investors owning more than five properties as commercial lending. This is how the Reserve Bank describes it:

"...if the bank has recourse to, or is aware of, more than five properties owned and let by the borrower directly or through a company or any other ownership structure of the borrower, and the loan is predominantly [more than 50%] serviced from the rental income those properties generate, then the loan can no longer be classified as a residential mortgage loan but should be classified as either income producing real estate or SME [small and medium sized enterprise] retail lending. The bank is required to verify whether the customer has any other rental properties or residential mortgage loans with another lender or lenders as part of its credit origination process."

SME bank lending is considered to be higher risk lending and is charged a higher interest rate.  To target larger residential property investors is a truly absurd notion given the diversification of a large residential property portfolio actually lowers risk - larger investors should pay lower interest rates than the single property owner.

The true purpose of the regulation is obviously to put the brakes on house prices by targeting existing property investors, just as they targeted first home buyers when they changed the loan to value ratios last year.

According to the ANZ survey the policy will cause investors to change their investment strategy – mostly by not buying new properties, or by selling.  Two-thirds say they would be less likely to buy another property.

Also high on the list of concerns is interest rate rises. Thirty-five percent stated this as their greatest concern, up from 28% last year.

Other key points are:

• Over the last year twice as many investors decreased their debt ratios than increased them.  Rising property values was the main reason (40% of investors), followed by higher principal repayments being made (18%), while 11% had sold a property and reduced debt. 
• The average debt level has fallen slightly in the last year to 54% of the property value.

- 34% had a debt to property value ratio of less than 50%
- 36% a debt ratio between 50-74%
- 22% between 75-89%, (24% last year), and
- 6% had 90% or more (down from 8% last year).

• Investors expect property values to keep rising faster than rents. Nationwide property values are expected to grow by 4.8%, and rents by 2.8%, in the next year. Over the next five years, Auckland property prices are expected to increase 12.8% annually and rents by 4.7%. In other words, Auckland's boom is expected to continue.
  
• Those intending to buy another investment property within the next six months continues to rise, up to 23% from 17% in 2010. 
• Investors holding properties in a family trust has increased from 23% to 31% in four years. 
• One in five investors had not come to grips with the insurers’ move to sum insured (instead of replacement). This is particularly concern given members of the NZPIF are likely to be more informed about this issue than your average property owner. The reality is property owners are likely to be underinsured and will suffer serious financial risk in the event of a Christchurch type natural disaster happening in their area.