Perhaps responding to Bill English, (“No asset price can go up at over 10 per cent a year forever, sometime it’ll stop”) the New Zealand Reserve Bank decided to consult on a new asset class treatment for mortgage loans to residential property investors within its capital adequacy requirements.

Be prepared

From a financial stability point of view, this is a good development, as it would help the Reserve Bank to implement targeted macro-prudential policies in the future, should that become necessary.

From the press release:

Reserve Bank Head of Prudential Supervision Toby Fiennes said: “International evidence suggests that 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 proposal would bring the Reserve Bank’s framework more into line with the international Basel standards for bank capital. The proposed rule amendment is designed to ensure that banks hold adequate capital for the risks that they face from investment property lending.”