Most of the banks in New Zealand have policies which make it harder to get a mortgage on an apartment (or sometimes anything that’s on a unit title, so terraced homes as well). They restrict lending on small apartments – less than 50 or 60 square metres, say – and require higher deposits.

Those rules are slowly on their way out, as banks start to acknowledge that apartments are now a more developed market than they were in the past – and hopefully, not prone to the same extent of boom-bust that they went through in the mid-2000s.

Apt consents

Kiwibank is officially changing its policies to allow for easier apartment lending:

“Kiwibank is set to reveal a new apartment lending policy in about this month.

It will allow deposits of as little as 15 per cent on owner-occupied apartments in the Auckland CBD with a minimum size of 40 square metres, and deposits of 10 per cent in apartments on CBD fringe and suburban areas. Apartments must cost a minimum $275,000.

That means borrowers will need a $50,000 deposit to get into a $500,000 city fringe apartment.

Most banks require 20 per cent for owner-occupiers and 30 per cent for investors, and will not lend on apartments smaller than 50sqm. Westpac allows some buyers to purchase apartments with a 15 per cent deposit”.

Most banks will be happy with a 10% deposit for a standalone house, so it’s good to see apartments being treated more equally.

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  1. This is a welcome change.

    However with deposit (10-15%) lower than house (20%), it could push the current overvalued apartment even higher, creating a risk when the market brust.

    The lending rules should protect the buyers to sure the title is not leasehold and it is built in high standard and with no leaky issues, and run by good body corps with reasonable bodycorp fees.

    1. Hi Kelvin, banks are certainly much more reluctant to lend on anything leaky or leasehold (and fair enough too). They’ll want larger deposits, and look at everything that much more carefully. But that’s more about protecting the bank than protecting the buyer (although it may well protect the buyer as a side effect).

      1. The effect of an easing of deposit requirements is to increase demand without a corresponding increase in supply. Good for bank profits.

          1. again, strictly correct but the effect really depends on the shape of the supply curve. I think it’s fairly flat especially in the long run. Also don’t over-estimate the tendency for the market to “over-supply” and thereby cause prices to fall at some point. Which they should do anyway …

    1. The lending rules will make it even more likely that more will be built, as it is entire apartment developments sell out within weeks of being listed, this will probably help the time to build even quicker.

      There are so many empty lots of sites utilised for low value industries like used and new car sale yards in central areas, so personally anything that increases the impetus for more developers to build is good IMO.

    2. Yes you would expect demand to increase, although the price effects will depend on the shape of supply curve, both in the short and long run.

      If the supply curve for apartments is relatively flat, which I suspect it is especially in the long run, then the supply response will be quite elastic and the cost of apartments won’t change very much.

      The other thing to throw out there: By shifting relative demands towards apartments and away from single detached dwellings, this change could cause prices for single-detached dwellings to *fall*.

      Overall long run effect on housing prices and total lending? Fairly small I would have thought. And (more importantly) overall welfare effects would seem to be positive, because people would not be taking out the loan if it didn’t leave them happier than they were before.

      Or is there a market imperfection that I’m missing? In general I think it’s good if there’s fewer arbitrary distortions between different housing typologies. Or are you suggesting that we’re past the optimal level of lending on housing as a whole? That would seem to a larger/separate macroeconomic question. Do you have an opinion on that issue? And/or whether the RBNZ should require banks to lend less?

      1. “If the supply curve for apartments is relatively flat, which I suspect it is especially in the long run, then the supply response will be quite elastic and the cost of apartments won’t change very much.”

        Why do you suspect that it is flat? The evidence that I see is that supply of apartments is severly constrained by planning rules? Elasticity is thus similar to the waistband of old underwear.

        ” this change could cause prices for single-detached dwellings to *fall*.” It could…or maybe not rise so fast. hence my use of the word relative.

        “overall welfare effects would seem to be positive, because people would not be taking out the loan if it didn’t leave them happier than they were before.” Seem is the operative word here. There is a whole well-financed industry (advertising) actively attempting to change perceptions and promote the idea that borrowing money makes things “affordable” when the converse is generally the case. I find some of it particularly loathsome.

        ” In general I think it’s good if there’s fewer arbitrary distortions between different housing typologies” Agreed. In respect of apartments, however, I suspect that loan restrictions have kept prices lower than they would otherwise have been.

        “Or are you suggesting that we’re past the optimal level of lending on housing as a whole?” Definitely tending towards that view and agree that’s a much larger issue taking into account the “too big to fail” aspect of banks etc etc.

        “And/or whether the RBNZ should require banks to lend less”. Interesting question on which I can offer a poorly-formed opinion in the absence of hard data. Gut feel says too interventionist and that it is better to expose the banks to a greater level of risk on lending for housing by removing the expectation that prices will always rise and demand will exceed supply. I think I would favour taxing capital gains (in the interests of taxing all income similarly) but my view is that housing is one of life’s necessities. When demand exceeds supply, increase the supply (easy to write, I know).

        Lastly I ask to reflect on Sly and the Family Stone’s song “Papa was a Rolling Stone” which, apart from having one of the best intros ever, stated “and when he died all he left us was a loan” …for 20 points: were they any better off as a result?

        1. I’ve been thinking about this a bit lately. Auckland’s fundamentally constrained by geography. In the absence of any planning regulations whatsoever, I would expect that to imply that apartment supply was more elastic than standalone house supply. The logic there is that it would be easier for developers to scale up/scale down the amount of building they put on a site than it would be for them to fish new land out of the ocean like Maui.

          You’re right to say that regulations have *historically* constrained this from happening. I took a look at this issue earlier the year:

          However, I’m tentatively optimistic that we will end up with a more efficient and well-targeted set of planning regulations in the future.

        2. The reason the apartment supply curve is fairly flat is because regulations will have reduced elasticity only up to a certain price point. Think of it this way: 1) regulations imposed 2) supply drop / prices rise 3) at some price point inpacts of regs are fully capitalised and hence elasticity returns to normal.

          So yes, i believe that the price escalation weve seen over the last decade is not indicative of the supply curve going forward. Plus the unitary plan is shaping up to alleviate some of these issues so if anything we may get a more than elastic supply response for a few years.

          1. “hence hence elasticity returns to normal.” so…not like old underwear at all.
            Seriously though, With 2 daughters at university in the city next year I have been made well aware of the exorbitant cost of housing and limited choice for those on low incomes so I hope you are correct.

    3. MFD, easing the deposit requirements is likely to shift the demand curve for apartments, yes. But that takes you to a higher point on the supply curve, even without moving the curve. That’s what Stu is saying below. And at any rate, there are certainly new apartments being built… not as many as I’d like, perhaps, but still a sharp contrast from a few years ago.

      1. It’s not so long ago that there was considerable angst on this blog re constraints on the supply of apartments due to planning regulations. Has something happened to address those constraints?

        1. It still remains unnecessarily difficult to build apartments; what has changed is the market meaning even in this restrictive and expensive environment it is more viable. Which is to say demand has risen, especially for proximate well connected dwellings. Apartments and terraces are the only way to supply dwellings to this market.

          We are having a second apartment boom and thankfully the Council this time is not treating this sector with the careless cynicism they did earlier; we are getting better buildings. But then again how much of this is down to the fact that in general the new apartments are aimed at a higher end of the market, reflecting land and construction costs?

  2. I’ve lived in apartments overseas. It’s a good lifestyle. It was relatively cheap. I rented.

    In NZ, apartments tend to be owned and renting can be precarious. I’ve looked at buying apartments and haven’t. The ground rent for buildings on leased land are outrageously high. They increase hugely every 7 or so years. You have to have significant cash flow to even attempt it. Definitely not for young working people or elderly on fixed incomes. Yet elsewhere – Canada for example – these are exactly the people you find in apartments.

    The whole model for delivering apartments in NZ is poor.

    In Ontario, Canada, most apartments are built by one of half a dozen apartment development corporations who retain ownership of the entire building and rent out the apartments. They operate as chains so you can move from town to city to town and not have to re-apply or pay the bond over again. You choose the city you want to go to and typically there is a range of buildings with apartments available with varying rents and amenities. It’s simple, relatively cheap….and this is where young couples and the elderly find decent, affordable apartment housing. This model arose because – mainly Toronto – was exploding population-wise and the provincial government needed tens of thousands of units quickly. So they picked a number of groups to go build them – for rent,not sale – and fast-tracked the approvals.

    NZ has none of this. If it did, many more people would be very happy to live in apartments

    1. Sounds like an interesting and nice system, also has the advantage of easily allowing whole blocks to be demolished and rebuilt at a later date since they’re in single ownership.

      However, regardless there’s no shortage of people wanting or willing to living in apartments but rather a lack of supply basically everywhere in the city. NZ rental laws do need serious attention, it’s not a desirable long term option when rent can be increased as often as the land lord wants and you can be kicked out with 3 months notice, further, in general as has been well discussed the standard of the housing stock is awful unhealthy and government is uninterested in getting involved – again basing policy on what will make more money for their mates not on what is the best for a large section of NZ society.

    2. really interesting model. Although I’d be interested in separating two key attributes:
      1) fast-tracked approvals for apartment development; versus
      2) the requirement that the apartments which were constructed are rented rather than sold.

      I see more benefit in #1 rather than #2, at least in the NZ context.

      More specifically, NZ’s rental market seems to be functioning fairly well, especially for apartments. What is not functioning well is the market for development of apartments and to a lesser degree single-detached dwellings. I suspect that’s a feature of layer upon layer of over-zealous density controls progressively imposed by local government with the support of NIMBYs.

      This has seen capital prices (for houses and apartments) skyrocket, along with it the price of land (we’ve made it hard to build up and out). This situation is further exacerbated by tax policies favouring property investment for capital gains.

      So I’m not sure we need to expand the supply of rental housing, versus simply expanding the housing supply in general. Hence I’d support #1 rather than #2.

      1. Stu, would you please clarify what tax policies you have in mind that favour property investment (I presume you mean over other forms of investment) for capital gains. Thanks.

    3. Hi Steve, you’ve said “In NZ, apartments tend to be owned”, as opposed to rented I assume you mean, but most apartments in NZ are rented out rather than owner-occupied. It’s close to 80% rented for the Auckland CBD, although I imagine there are more owner-occupiers in suburban buildings, etc. But one of your other points is that there aren’t many buildings in NZ where a single entity retains control of all the apartments. You’re quite right there, and I wonder if part of it is because apartments have been so strongly marketed at (often offshore) investors, and because the NZ tax regime favours private landlords over corporate ones (corporates have to pay company tax, so essentially don’t get the tax-free capital gains that private landlords tend to enjoy). This does seem to be changing a bit – e.g. I understand The Orange is going to remain in single ownership and be rented out, and likewise The Boutique which Mansons are building by Vic Park – but it probably won’t change much unless corporates find NZ more attractive to invest, and more movement on the tax issue.
      As to the leasehold issue, ground rent changes are based on land price increases, and those have been very significant. Buyers are now, understandably, very reluctant on leasehold. For Wynyard Quarter and other new leasehold sites, the developer is essentially paying all the ground rent for 100+ years up front, and capitalising it into the purchase price. So there’s more certainty over what the payments will be, i.e. nothing during the lease term. I expect to see more of this going forward.

      1. John, you refer to private landlords having a tax advantage over corporates in respect of capital gains. Could you please expand on his distinction – as far as I know the tax rules are common to all, ie capital gains are taxable to a trader (and now within 2 years of purchase regardless), but not for a long-term hold. Similarly depreciation recovered is taxable to all. Where capital gain or income is taxable, corporates actually have the advantage by paying only 28% tax on profits while trusts, and individuals at the margin, pay 33%. Thanks.

        1. Hi Jonno, I’m not an accountant and may be wrong here, but I made my comment on the assumption that a corporate investor would be subject to tax on realised valuation gains, i.e. when they sell a property for more than they paid (taking into account capital improvements, depreciation etc). I know they don’t pay tax on unrealised valuation gains, but presumably they would need to pay tax at the time of the sale, since property ownership is a core part of their business.
          If I’m wrong on that, then I’d agree there isn’t really a tax advantage for private vs corporate landlords.

          1. Thanks John, you may have been thinking of depreciation recovered being taxable, which applies to anyone. I suspect that many private owners in the past obtained an advantage by failing to declare this, either through ignorance or guile (whereas corporates were less likely to attempt it), and IRD simply dropped the ball. Now that buildings are no longer depreciable this will eventually work its way out of the system.

            On your substantive post, relaxation of the lending rules may well push up apartment prices. For years their capital gains have trailed behind those of stand-alone houses, but this may be changing. Recently an apartment sold for a staggering $400k more than a near-identical unit in the same block (same level, same view, same size) that was sold about a year ago. This may have been a one-off of course; it’s not exactly a decent sample size! And cost per sqm for apartments still remains well above house rates.

          2. Where there maybe a disadvantage for corporates, is that when the profits are paid out to shareholders, the shareholder distributions will be taxed at applicable marginal rates (or corporate/trustee rates if a company or trust is shareholder) as income. As the company hasn’t paid any tax there won’t be any imputation profits to offset against.

            So indirectly capital gains from corporate owners are taxed.

        2. Ten seconds of Googling brings up IR361 “Tax and Your Property Transactions” on the IRD website. In essence by setting themselves up as an investor rather than a speculator or dealer an individual pays no tax on any profit on sale of the property. By conveying the impression that the purpose of buying the property is to generate rental income the individual can be categorised by the IRD as an investor so that when, at some time in the future greater than 2 years a profit is fortuitously realised no tax is payable. No such category exists for a company.

          The way I see it buying housing and renting it out is, ipso facto, a business and is very different from buying shares, bonds and other such passive investments. If I were boss of NZ I would class buying housing for the purpose of renting it out as a business with all that entails such as paying tax on the income of that business including the eventual sale of the assets. At the same time I would instigate a general capital gains tax for those not in business on the basis that currently the fruits of speculation go untaxed while productive effort is taxed.

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