Residential property investors in Northland could soon fall into a high risk lending profile due to high loan default rates on mortgages serviced by rental incomes. The Reserve Bank's deputy governor and head of operations Geoff Bascand spoke to Christine Allen about these changes and how Auckland's hot property market could burn Northland.

The Brynderwyns might bridge the geographical divide between Northland and its big economic brother Auckland, but when it comes to lending policies for housing, the same rules apply.

This is something the average Northland home buyer may have criticised the Reserve Bank for since 2013, when it introduced the blanket loan-to-value ratio (LVR), or "speed limits" of over 80 per cent. The restrictions were designed to cool down heating property markets in Christchurch and Auckland, caused by housing shortages and easy credit.

Speaking to the Business Advocate after a Northland Chamber of Commerce presentation in Whangarei on Thursday, Geoff Bascand said if Auckland's property bubble did burst, the credit taps would be turned off for regions like Northland.

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"The finance sector would close lending. Firms would be looking to repair balance sheets and it would impact the flow of funds."
However, he felt the NZ banking system was "well capitalised and stable".

Bascand said regional restrictions would not only be impractical but would not fix the problem.
"The housing problem is not just about Auckland. There are rising house prices in Christchurch and the Waikato.

"Also, if someone bought a house in Whangarei but borrowed from a Hamilton bank, from a practicality point, that [restrictions] would be difficult to introduce."
Bascand said also that China's housing market had slowed, which could effect the region's forestry hopes and lumber export market.

"They [China] have high urban vacancy rates and building in China is likely to moderate."
Meanwhile, population continues to grow in Auckland and the Super City is trying to build its way out of its housing crisis, meaning opportunities for Northland tradies and suppliers, he said.

Bascand had flown into Onerahi on Thursday morning with Prime Minster John Key. While no words were exchanged between the men, Bascand was aware that Key was off to fight National's byelection corner.

A byelection doesn't shake economic confidence like general elections, Bascand explained, before we veered off politics and jumped back into the issue of housing.

Lending
The Reserve Bank has started a consultation process with banks and the property sector on a new asset class treatment for mortgage loans to residential property investors.

Default rates and loss rates experienced during sharp housing market downturns tend to be higher for residential property investment loans than for loans to owner-occupiers.
The change would allow banks to hold appropriate regulatory capital on this lending and would group loans with similar risk profiles.

The consultation is focusing on the definition of a property investment loan and gives three options.

"We are asking questions like is the mortgage property owner-occupied, or is the servicing of the mortgage loan primarily reliant on rental income or thirdly, not at all reliant on rental income," said Bascand.

Consultation closes on April 17 and as soon as the Reserve Bank has settled on a definition, it will require all locally incorporated banks to include residential property investment mortgage loans in the specific asset sub-class.

Bascand said this change came about as the commercial property market was distinguished by a higher default correlation across commercial property loans. The risk from investor properties, he said, could be fixed by applying the same loan risk analysis to property investors as existing commercial loans.

Before joining the Reserve Bank in 2013, Bascand was the Government Statistician and Chief Executive of Statistics New Zealand as well as being a senior economist at the International Monetary Fund.

The Reserve Bank has resisted engaging in riskier investments, such as investing in equities or gold, as some central banks do, despite the potential for higher returns.

It generated a net profit of $56 million in the 2014 financial year, down from $308 million a year earlier, generating earnings from domestic market and foreign reserves management. These primarily assist it in fulfilling its duty as monetary authority and prudential supervisor.

The Reserve Bank's core function is to promote a sound and efficient financial system by monitoring the macro economic picture and the microecomomics of individual markets.