Gareth Vaughan suggests that whoever is in government after the September 23 election, the RBNZ's unlikely to get a DTI tool and largely has itself to blame

By Gareth Vaughan

Has the Reserve Bank missed the boat on getting itself a macro-prudential debt-to-income (DTI) ratio tool?

That may seem a premature question when the prudential regulator has only just issued a consultation paper on the concept, and submissions aren't due until August 18 meaning the process has months to run yet.

But, ahead of the September 23 election, the lukewarm response from the Finance Minister and his Labour shadow must be concerning to the boffins at number 2, The Terrace. That's because, under its Memorandum of Understanding with the Finance Minister, the Reserve Bank must get said minister's approval to have a DTI tool added to its macro-prudential toolkit.

Grant Robertson, Labour's Finance Spokesman, issued a statement saying, “Labour does not support debt to income ratios for first home buyers."

"The introduction of across the board debt to income ratios for home lending would punish first home buyers struggling to get into the housing market," said Robertson. "Thousands of young New Zealanders would be shut out of the security of home ownership."

And, speaking to Radio NZ, Finance Minister Steven Joyce also sounded reticent.

"There's a risk also that the Reserve Bank ends up taking over decisions for people that they really should think about themselves. There's a moral hazard in that. In other words people can think if the Reserve Bank and the banks let me do it I should do it. And actually we do need people to think carefully about the amount they borrow at any time," said Joyce.

'A significant intervention'

Joyce has also noted that DTI limits are designed to regulate the amount of debt a mortgage borrower can access relative to their incomes. And that the use of DTI ratio restrictions would be a significant intervention in the housing market. So reading between the lines it sounds as if allowing the Reserve Bank to have such a tool may be a step too far for the National Party.

And with Labour wanting to protect the sacrosanct first home buyer, it sounds as if they would prefer a different approach to tackling the issues a DTI limiting tool would target. Robertson's statement suggests as much by promoting "building more affordable homes and cracking down on speculators who are driving up prices."

Ahead of the September election media headlines on DTI stories like Radio NZ's Thousands of home buyers could be knocked out of housing market, and Stuff's Debt-to-income ratio would stop thousands from buying houses, won't be encouraging politicians to speak out in favour of giving the Reserve Bank the tool. That might feel a bit too much like turkeys voting for an early Christmas.

Looking further down the line there's a five-year review of the macro-prudential Memorandum of Understanding due in 2018. With a new Reserve Bank Governor set to be appointed next year at an early point in the next electoral cycle, I won't be surprised if the DTI can is kicked down the road until then.

A good case

But even then will politicians' appetites have changed? If I was to take a punt on answering  this question, I'd say no. That's whether Auckland house prices begin a renewed surge, or continue on their recent downward trajectory. And that's despite the fact that, from a financial stability perspective - which is what macro-prudential tools are all about - there's a strong case for the Reserve Bank to have a DTI tool.

New Zealand households are carrying more debt than they ever have, with the household debt-to-disposable-income ratio at a record high of 167%.

Reserve Bank Governor Graeme Wheeler recently highlighted that borrowers taking out loans at high DTIs are vulnerable to rising interest rates or declines in income. The Reserve Bank says the share of new bank lending at DTI ratios above five, which the Reserve Bank views as "pretty high" and I'd agree, has continued to grow over the past year for first-home buyers and other owner-occupiers, to 36% and 42% respectively in March. Meanwhile, Wheeler also points out Auckland's house price to income multiple has risen to 9.5 or 10 times from 6.5 five years ago. A median multiple of 3.0 times or less is generally regarded as a good marker for housing affordability

Look in the mirror

Back in February, when Joyce requested a cost-benefit analysis and public consultation from the central bank before any decision was made on potentially adding a DTI tool to the toolbox, I argued the RBNZ had itself to blame. That's because if the prudential regulator had requested a DTI tool be included in its macro-prudential toolkit when the toolkit was being established in 2013, it's unlikely to have faced the political heel dragging of 2016-17. The debate at that time, to the extent there was any, was whether the Reserve Bank should get the toolkit, not what tools should be in it. 

In its consultation paper the Reserve Bank has acknowledged problems with collecting DTI data from banks, with inconsistencies in how the banks collate it. About a quarter of the high DTI loans featured in Reserve Bank data are reported "erroneously" by banks, the Reserve Bank says, meaning banks' DTI data contains "artificially high results," and these issues may "disproportionately affect investor lending." 

This means the Reserve Bank's analysis and case for needing a DTI tool is wide open for attack from self interested debt peddling banks, property spruikers and other critics through their submissions and lobbying of politicians.

Here I can't help thinking the Reserve Bank's light touch idiosyncratic oversight of banks will come back to haunt it. It was only really in late 2014 that the regulator started to sound remotely interested in probing the concept of DTI restrictions, with Deputy Governor Grant Spencer saying, "We've been doing some investigations about debt-to-income, about debt service ratios, collecting more data."

The Reserve Bank could have had banks reporting uniform DTI data for years. But for a regulator that,  as the International Monetary Fund recently highlighted, doesn't even conduct on-site inspections of the banks it regulates, such a move wasn't on the agenda.

And now the Reserve Bank hierarchy wants to add a shiny new DTI tool to its toolkit. They'd be wise to not hold their collective breath while they wait.

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36 Comments

Anything...can be created synthetically. If DTI can't be introduced under that name, they can be formed by using other prudential tools, to 'create' them. Arguably, DTI's are already in place. How the banks are determining them will be the result of RBNZ 'encouragement'.

The Banks are a big part of the problem , they have lent money against ridiculous property prices , in some cases as much as two times or even three times the GV .

Here's a case in point :-

21 Chester Avenue Greenhithe with a Rateable value of $285k was sold for over $1,000,000 in August 2016 , and guess what ?

Barfoot and Thompson have it for sale on Mortgagee Sale and the Bank want to get " UPWARDS OF $1,0 million" and is offered by Amanda Zhou at B&T, the Property ID is 594965 on the B&T website

It went to tender in May and has not sold

The Bank deserves to take a haircut of such reckless lending ...... what were they thinking ?

.... but ... unless it sells for under the price it fetched in August 2016 ... then no one's lost any money , have they ...

And it can't possibly go down ... 'cos as we all know : " You can't lose with property , MATE ! " ... chuckle chuckle .... snigger ... snort ....

we know DTI will never happen with national,
but it will be interesting if it allows for the FHB not be in included if labour would stop it for everyone else.
once it is enacted for on group say investor lending, it is only a matter of time before it encompasses all lending

DTIs are both positive and negative for FHBs. Firstly they will protect the FHB from shouldering excessive debt, limiting their vulnerability to interest rate rises, and other fluctuations, but on the other hand they will impact FHBs the most, keeping them out of the market. At the end of the day it will come down to how that income is measured for it to have an impact on investors. When considering how a DTI is to be applied, it must also be considered as to who they are targeting.

I agree, it seems that all the suggested tools will have the biggest impact on FHB, and potentially existing home-owners (i.e. the people that just want a family home)

Investors and foreign buyers will not be bound by most of the restrictions so will have free reign.

DTIs will make it easier for FHB to buy a house. DTIs place an upper limit on house prices in relation to income. Without runaway house prices, the lower deposit need for a lower priced house will be easier to achieve.

How exactly?

If there are 4 buyers, 1 of which is foreign (with foreign money), they will still be able to outbid the local FHB.

Even if there are 20 buyers, as long as there is one person (investor, foreigner) that is not restrained by either a DTI, or even a NZ Mortgage - they will still get the house. Although granted they won't have to pay as much for it as the FHB won't be able to bid past x amount.

But the government claims foreign buyers aren't a problem and only represent a tiny percentage of buyers. This means that they are not outbidding kiwi buyers.

So either foreign buyers are a problem or they aren't, the government can't have it both ways.

Lol, they can push what ever message they want. I don't think we the people believe it though.

I think their current inaction on LTIs is them covertly acknowledging the "actual" problem. A full stop to foreign ownership though would be a bit too honest for the current mob.

It's a big worry if we can't believe what our government tells us. Guess our media is so weak that it doesn't really investigate these things anymore

People don't trust the media either.

Countless generations of lies are all coming home.

Q: How do you tell if a [insert occupation here] is lying?
A: Their lips are moving.

Blaming RBNZ again...........Remember that National is still in power.............

... what a pity that all the minor parties can't cobble together enough seats to form a coalition , and to banish both Labour & the Gnats to the sidelines for 3 years ... to give them both a full term to look hard at their disconnect from us , the great unwashed , the voting public ...

Gareth Morgan is a shocking public speaker; his Parties solutions for our future and the economy suspect at best and hisTOP stands no show of getting in, but I signed up with them yesterday ( the first political party I have joined in my life!) and will vote for them, regardless.

Lol, that's the sort of voter confidence I like too see ;-)

To paraphrase. - Policies are suspect, leader is a clown, they have zero chance. But hey they got my vote!

If this doesn't sum up just how bad the Nats are, I don't know what does.

Does anyone know why the RBNZ keeps saying they would like to have DTIs in the toolkit, but that they would not implement them now if they had them?

Their argument, as I understand it, is that current market conditions don't warrant the use of a macro-prudential DTI tool.

Implement DTIs so that they lock almost everyone out of the housing market. Then the only way to sell a house is by pricing it in a fair manner.

New Zealanders need to get their debt problem under control and if they won't do it themselves then it will eventually end up being imposed on us all.

Interesting comment and largely agree BUT it is on the assumption that the market only consists of local buyers and that DTIs are well structured and applied consistently. We know both are unlikely to be true. Besides local investors will like have more capital to play with and therefore less likely to be impacted by DTIs.

Still I like and appreciate the idealism.

One thing seldom mentioned is how well "income" will be monitored over time. Sure, when the mortgage is taken out, income can be verified. Its a starting point. But they may have just borrowed some money off their parents or siblings and unbeknownst to the bank will need to pay it back. And if there is an economic downturn and people start losing their jobs, the bank may not be notified....
I suppose that these things can happen at the moment though. So if in general, if peoples starting points are improved, and if house prices drop as a consequence, then overall, things would be more stable.

At the crudest level Banks monitor debtors' income by seeing if the mortgage payments are being made on time.

Exactly mate, I lost my job and did not tell my bank, why would you as long as you keep paying the mortgage they don't care so why frighten the horses and create trouble for yourself ?

Income = Weekly/Monthly wages going into a bank account with the lender. Have you noticed how all the mortgage adverts include 'must have an account with us' to be able to confirm the regular income. Regular payments from Dad's current account won't get past the sniff test!

I have just noticed that home ownership rates continue to fall and have done so without DTI. Why don't we just build a wall around the million dollar suburbs of Auckland. Rename it Auckland FU, Open the gates each morning to allow it to be serviced by those that live in the rented suburbs of Auckland Have nots .

Pretty sure Zach suggested something similar a few months ago, Elysium or something....

So Robertson is happy for young first time home buyers ( often with young families) to get themselves over - indebted and up to their eyeballs in hock for the next 30 years ?

My take on excessive debt debt is that it almost always leads to tears , divorces , lost homes , broken families and broken homes

... but maybe we can defy hundreds of years of previous experience across every single economy on the planet , where excessive debt leads to recessions , depressions and massed bankruptcies ... divorces , lost homes , broken families and homes ... dashed dreams ... lives ruined ...

Maybe , here in NZ at least , we are truly special ... and " This time is different . " ...

... hee heee heeee ... I nearly kept a straight face when I typed that !

We really need some regulations and comtrols in place to protect FTB's. Otherwise RE' s will try to take advantage and persuade them to spend that little bit more which then quickly spirals up to being a lot more debt. We seen this happen over and over again. But this does need to be combined with other measures such as the Foreign Buyers tax to stop overseas investors from hoovering up the more affordable property that the FTB' s need.

It would be far safer to say to the Banks ................... "If you lend recklessly to a FHB you may not take them to court if they default and there is a loss on Mortgagee sale "

The Banks would be far more careful about their lending practices than they have been recently

In other words, you are advocating non-recourse loans, USA style

Couldn't agree more

Great in theory but FHB interest costs would increase and/or they would be forced to buy insurance policies to protect the Banks. Therefore making it easier for existing home owners to compete against them.

There already is DTI in New Zealand just have a chat with my bank manager and he'll sort this out for you.

Maybe all that is needed for the lender/lendee nexus is an insistence, as it exists for insurance contracts, on Uberrima Fides.

Neglect to inform your insurer about your foray into EireBandB, that 44-gallon drum of petrol in the garage as Long Emergency rations, that $10K watch or that you are retailing brown parcels to the Web from your spare room, and see your policy vanish in a cloud of smoke.

Cleverer minds than I can no doubt wrangle some Lender Doco wording to the same effect.

The consequences of reckless lending by banks should be borne by them. It's not as though they subsidize the interest rates they charge borrowers, on top of personal guarantees and other securities for the loan. Banks have a almost perpetual need for house price inflation to keep them in the black. Accounting where a Dollar deposited by a customer into a cheque account gives the fractional reserve license holders $20 to lend out. Nice margins. Commercial Property Owners in the CBD have a big interest in ensuring more and more centralization of the Auckland "Super City", thereby ensuring increasing property prices in the zone. To what extent do they control who makes central planning decision at Auckland Council? In this electronic age, how come there are so many "skyscraper" buildings for banks, insurance companies, council and council controlled non-accountable entities in the CBD?
This dumb fascination with an ever denser population in the city zone means massive traffic issues in and out every day, plus house prices closer to the city keep increasing in price. A failure to decentralize new business hubs outside of the lemming zone means gargantuan capital projects to try to alleviate the chaos. The stupidity of this is just mind blowing.
Heaven forbid Auckland City gets hit by a tsunami.

The RBNZ has been ineffective to say the least. I agree the government has been denying there is a problem and have been applying the screws and spew positive spin even though they know it is rubbish, that is what politicians do to get votes. The RBNZ mandate is different, it needs to assert its independence and do what is required maintain financial stability in NZ. However they are stuck in a rut of not making decisions and seeming to seek government blessings before making decisions to do their job. This failure and subsequent break down of the economy is their legacy and their mess to fix. About time they start to do the job they are hired and paid for by the tax payer.