Potential loan-to-income cap could hurt adviser business

by Maya Breen02 Nov 2015
The Treasury is pushing for a potential loan-to-income cap to be introduced to put further restrictions on mortgage lending but the Property Institute and Professional Advisers Association say the repercussions could have a possible detrimental impact on mortgage advisers.

The Property Institute of New Zealand’s chief executive Ashley Church told NZ Adviser the biggest impact a possible loan-to-income cap would have on advisers would be to “dry out a substantial portion of their income.”

“People would only be able to borrow more than a certain amount and that amount, depending on the level at which it was set, would be insufficient for them to buy a property in locations like Auckland – so it would have potentially quite a devastating effect (on some advisers),” says Church.

If borrowers’ ability to take out a mortgage was restricted by their income amount, Church says the rise of joint mortgage applications with friends or family could be a possibility, but would occur for the wrong reasons.  

“The ability to (joint purchase) is already there - the fact that people don’t do it in large numbers indicates that most people prefer to own their own property,” says Church.

“You’d end up with these shared ownership models, not because people wanted to do that but because that’s the only way they could buy a property and I’m not sure that’s what we want for New Zealand - I’m not sure that’s necessarily a good thing for the country.”

Church says another potential impact of such a policy would be deterring small to medium size property developers. 

If income ratios were applied and property could only go to a certain point and no higher, the commercial risk for developers would increase as the potential return is limited. 

“So you would effectively, over a relatively short space of time, basically kill off a big chunk of the residential property development market which is exactly the opposite of what Auckland needs right now – which is to build as many homes as possible.”

The Reserve Bank confirmed last week to the NZ Herald it is currently collecting loan-to-income data from the banking sector to better understand the New Zealand mortgage market.

But Church says it’s important to remember that the Reserve Bank is not focused on fixing the property market but rather in keeping inflation within the bands it needs to be.

The Professional Advisers Association CEO Rod Severn told NZ Adviser he agrees with Church in that there are unintended consequences in implementing a loan-to-income cap. 

“This is a very complex issue, and I think adding another layer of legislation across an already reasonably regulated area to me is going to cause additional problems.”

He says it would definitely make it more difficult for first home buyers to break or stay in the market and may force them to continue renting or leave Auckland to buy elsewhere. 

“The consequences of some of those things would be fewer mortgage advisers around because they’d have less people to deal with.

“It would put additional stress on the rental markets - it would certainly bump prices up because there’s demand for it as they can’t afford to buy so they’ve got no option - either stay at home or go and rent.”

And he adds the increase of joint mortgages for those desperate to get into the housing market could have further effects on those involved in the purchase.

“I think there is a real risk of an increase in joint applications and the other side of that coin is… with parents who are a joint applicant, that can put a great strain on the retirement age and ability to retire for the parents.”

Finance minister Bill English said in an interview with TVNZ yesterday that the government will be “procuring the capacity to develop thousands of houses” in the next 12 months.

English says the Reserve Bank governor hasn’t yet raised the issue with him about income ratios.

“I wouldn’t rule (income ratios) out. There’s no obvious reason to rule it out. We’re flat out working on the supply side. And the next steps there are to go to the market for procurement on the government-owned land, to launch a procurement for up to 8000 houses in Tamaki and develop a pipeline for other large procurements so that the market can see the government building thousands of houses in Auckland out over the next five to seven years.”

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