Curb on loans hard on investors

Thousands of mum and dad investors could lose money through finance company failures if mooted Reserve Bank curbs on mortgage lending succeeded in cooling the housing market, a leading fund manager said yesterday.

The Reserve Bank said this week it was reviewing a range of options to limit lending to house buyers.

The moves were being considered because a succession of official interest rate rises had failed to tame the booming housing market and rising inflation.

The options have been almost universally panned by banks and others in the finance industry for smacking of old-fashioned interventionism and because they may have unintended consequences.

Tower Financial Management chief executive Tony Hildyard, who has already warned about the risk to investors in finance companies lending to property developers, said there could be trouble for those companies if the Reserve Bank's moves succeeded in crimping property prices.

He said finance companies were hugely leveraged and had been borrowing through a honeymoon period with low margins and low borrowing rates and didn't have a lot of fat if property prices crashed.

National Party finance spokesman John Key said a "significant amount" of the $14 billion invested in finance companies, much of it through popular high-yielding debentures, was going into property developments. In some cases, that was happening without the full knowledge of the investors.

"Mum and dad lend to a finance company and have this implied view that they're all above board and hunky-dory which, on one level, it is when they go into it," he said.

"But, of course, if the property market implodes, it's just not the subby who doesn't get paid or the person who's bought an overpriced thing or even the developer, it's the people standing behind the developers - the finance companies.

"If they fall over, of course they're not guaranteed so you start having a tremendous sort of effect where it blows out."

FundSource managing director Binu Paul said the Reserve Bank proposals would likely have some effect on finance companies. "It's going to be a challenge for them, there's no doubt about it", but it was difficult to say exactly what the effects would be.

McDouall Stuart Securities executive director Chris Stone, who conducts research on 40 finance companies, said most were capable of withstanding softer markets.