The Reserve Bank (RBNZ) has released details of the framework for its long-proposed debt-to-income (DTI) restrictions for borrowers taking out loans to buy residential property, saying separate DTI limits for owner-occupied and investment property could be possible.
The RBNZ has also included some estimates of the administrative costs to banks of implementing the framework, but says the benefits of DTI's will outweigh these.
DTI limits are calculated based on a simple ratio of borrower debt divided by borrower income. The RBNZ says it hasn't made a decision to activate DTI restrictions, and nor has it established a particular DTI setting at this stage.
A so-called macro-prudential tool like loan-to-value ratio (LVR) restrictions, the RBNZ has been proposing that if a DTI limit is introduced, it would be just one across both owner-occupiers and investors. But it's now showing more flexibility on this.
"In response to feedback on the DTI framework consultation, we have decided to include the option of separate DTI limits for owner-occupied and investment property within the framework, as currently exist for the LVR restrictions. Although our analysis to date suggests that it may not be necessary to have differentiated limits, given that the impacts of a uniform DTI restriction are likely to bind predominantly on investors and higher-income borrowers, incorporating the option of differentiated limits into the DTI framework design will enable us to adjust the relative impacts in the future if required," the RBNZ says.
"Another point to consider in this context is the interaction between DTI and LVR restrictions... it is possible we could loosen LVR settings if and when DTI restrictions are in place, while still maintaining our financial stability objectives. This would benefit first-home buyers, since saving for a deposit on a first home can be challenging particularly for those on lower incomes."
Long running process
The RBNZ has wanted to have a DTI tool in its macro-prudential toolkit since at least 2016 but struggled to secure government support from firstly the National-led government and then the current Labour government due to concerns about the potential impact on first home buyers. It finally gained support from Finance Minister Grant Robertson in June 2021 as the housing market ran rampant.
The RBNZ has made no commitment to enforce DTI restrictions. Rather it has previously indicated it could have a DTI limiting tool for lenders to use on borrowers taking out home loans ready to go in March 2024. It's still going by this timeline, with the banks therefore getting 12 months to get their systems ready, should they be required. The RBNZ says given the housing market is currently in a downturn, there's no immediate need to implement DTI restrictions.
In the Regulatory Impact Assessment released by the RBNZ on Monday the central bank says the costs of DTI restrictions include administrative costs for banks and "allocative efficiency costs" from reducing credit availability to some otherwise credit-worthy borrowers.
"Our analysis indicates that the potential benefits of DTI restrictions would significantly outweigh their costs," the RBNZ says.
"The DTI framework incorporates design elements that will mitigate efficiency costs – in particular, the use of exemptions for certain types of borrowers, and ‘speed limits’ which allow banks to continue extending some loans to borrowers above the DTI threshold. In addition, introducing DTI restrictions may enable us to loosen LVR restrictions on residential mortgage lending while maintaining our financial stability objectives. This would have an offsetting benefit for allocative efficiency."
The RBNZ highlighted some of what will be involved for the country's banks, who will need to incur administrative costs to prepare for the potential implementation of DTI restrictions.
"These costs include changes to IT systems and training staff on the application of the restrictions," the RBNZ says.
"In our consultation on the DTI framework, we asked lenders if they could provide an estimate of the scale of these implementation costs. Respondents generally indicated that it was challenging to quantify costs at this stage of the process. However, based on the figures we received, we estimate that the system-wide costs of changes to IT systems could be in the range of $1.25 million to $2.5 million.
"We did not receive any quantitative estimates for the costs of staff training or other implementation costs. However, we note that even if these costs were significant – for example, if the total implementation costs were in the range of $10 million – this would be a small figure relative to the potential scale of both the financial stability benefits and allocative efficiency costs of DTI restrictions."
The RBNZ says if the DTI restrictions are actually activated, the costs and benefits of them will depend "to a significant extent" on how they are calibrated.
"We will assess the impacts of different calibrations separately prior to any decision to activate DTI restrictions. As part of this assessment we will also consider the interaction between DTI and LVR restrictions."
No immediate need
The RBNZ acknowledge that the housing market is currently in a downturn "and we do not see an immediate need to implement DTI restrictions".
An alternative therefore would have been to not put in place the DTI framework now, "but instead to wait and assess whether DTI restrictions are needed at a future stage of the housing cycle".
"While this would avoid administrative costs to banks in the short term, there is a significant chance that if the housing cycle turns and financial stability risks begin to rise, there would be insufficient time to put the framework in place to address these risks. This is because banks have requested a lead time of 12 months to prepare their systems for the potential implementation of DTI restrictions."
Much has been said in the past about the potential impact of DTI restrictions on first home buyers. The RBNZ says the impacts of DTI restrictions on first-home buyers will depend on how they are calibrated.
"However, our analysis indicates that DTI restrictions will generally impact more heavily on investors and higher-income home buyers, who borrow at higher DTI ratios on average.
"Our Memorandum of Understanding with the Minister of Finance on macroprudential policy requires us have regard to avoiding negative impacts, as much as possible, on first-home buyers, to the extent consistent with our financial stability objectives. We are also required to have regard to financial inclusion more generally under our Financial Policy Remit. It should be noted that lending to first-home buyers, like other borrowers, is subject to bank tests of debt servicing affordability independent of whether DTI restrictions are in place."
RBNZ Director of Prudential Policy Kate Le Quesne says publication of the framework now does not immediately activate DTI restrictions or set a calibration, or level, for them.
"Instead, it provides banks with clarity in terms of the definitions of debt and income and future data reporting requirements, and it provides them with a timeframe for making any changes to their internal systems and processes to be able to comply with a possible DTI restriction in future," she says.
"DTI restrictions on residential mortgage lending, when implemented, set limits on the amount of debt borrowers can take on relative to their income. This supports financial stability by limiting higher-risk mortgage lending, thus reducing the likelihood of a future housing-related financial crisis.
"This in turn helps us to meet our statutory objective of ‘promoting the maintenance of a sound and efficient financial system.
"By linking credit availability to income growth, DTI restrictions complement other tools we use to support financial stability, including LVR restrictions on residential mortgage lending."
The RBNZ announced its decision to add DTIs to the central bank's 'macroprudential policy toolkit' in April 2022 and a public consultation on the exposure draft of the DTI framework was held in November 2022.
"Stakeholders were generally supportive of the proposed design of the DTI framework and agreed with our overall approach to keep the framework simple and clear," Le Quesne says.
More of the documentation released by the RBNZ is available here.
*Additional reporting Gareth Vaughan.
70 Comments
That bounce you seem keen on HW2, green shoots etc.....
Not if DTI comes along...... The mere announcement that the framework will be implemented just in case will be enough for some to realise that the market is not going to bounce and its probably best to GET OUT NOW.... rather then have all their dead money subsidising tenants.......
Yes they will out soon IT Guy. My guess is they will not be good, Auckland auction prices, more often than not, have not made the QV estimates - which until recently have been fairly on the mark. Suggests the market is falling more rapidly than prevously. Market feels very different here also but hard to get info to gauge, except the HPI!
While there could be some advantages to it, the primary focus of RBNZ should be on its core responsibility, which is to ensure price stability. Why does RBNZ want to interfere with the regular credit creation of a commercial bank, given it already has significant supervision and oversight responsibilities. Its sole focus should be bringing price stability, which is what is missing at the helm.
It seems that Orr has a deep desire for accumulating tools, as if he wants to be the sole monarch of the financial realm. He is a master manipulator
The RBNZ acknowledge that the housing market is currently in a downturn "and we do not see an immediate need to implement DTI restrictions".
A candid admission that this tool is intended as a way to try and manipulate house prices, and not to save people from themselves.
Absolutely this is a tool to link house price growth to income growth...... they will set it up and pull the trigger on the first sign that the market has GREEN SHOOTS
Right about the point that HW2 finally understands that the RBNZ is DETERMINED to stop the past runaway house price growth returning.....
I can always tell when you are desperate as you keep referring to me directly and randomly. Just this article has been two times and then you pounce on my response.
In the vain endeavour to quash and dismiss any positive conversation. Its not good for your business.
I love it
The most important thing about this release? It's been made.
Remember when the RBNZ told us to 'get ready' for a Recession? Well here's a similar sort of announcement.
Ignore it if you wish, but don't be surprised when it's enacted, and probably in a more robust form to boot.
Oh but I suppose its ok that Amokk denigrates and insults. You won't call him out.
You've said plenty of rude and horrible things so you're in no position to complain housie. What have I done by encouraging someone to upvote. I'm glad he got 22 votes, I cant help being positive even if somewhat innocent. Whilst youre priceless with your crude unsolicited sexual comments which have no place here
Yes the implementation of DTIs at the bottom of this long overdue residential housing crash - will ensure any future growth will be muted, subdued to wage growth.....historically in the 1 to 4% band.
So stake the Ponzi vampire with high interest rates and when it finally hits the deck in 2024/2025, DTIs will ensure it is entombed forever......never to see the night or fly again.
It will be implemented at the bottom of this crashing market.......then DTI to set in stone a new lower benchmark, that will be tied down to average income growth.
A property spruikers worst nightmare....Tony Alexander and Ashley Church will be spitting tacks!! Their religious belief system (property always goes up and a will double every 7 to 10 years) in being dismantled and shattered to pieces.
I might be missing something, but would a lower house price base not reduce the incentive to take a risk by build new houses? Having this apply going into / immediately after a recession risks builders leaving the industry as they find work in areas with greater demand, does it not? Would we not simply end up in the same situation as the last recession where building activity takes the better part of a decade to catch up to demand once we finally realise that supply is part of the equation?
And it is happening now - big time.
A relative runs a chemical company supplying products to all sorts of business, including builders. Revenues are down 30% over the last two months. An analysis shows it is mainly building related. Scarily, the analysis shows there is more to come.
The owners, salesmen and senior management are selling their high end cars and dumping other assets likes boats and rental properties - both to reduce costs but also to raise cash as a capital injection to stay afloat may be required.
Shock and Orr is an appalling economic policy.
We already have builders collapsing at the current price points, what are the odds that trying to lower the price point pushes out all the smaller players and we end up with an oligopoly (much like in the banking sector) capable of holding the country to ransom by charging whatever they want?
you might get lower prices for a year or 2 (long enough to kill off the small players) followed by capacity constraints and reduced competition pushing up prices for 4-8 years (assuming people still enjoy having a roof over their heads regardless if fewer of those are being made). I recall almost exactly this scenario happening post gfc. Borrowing restrictions were put in place by the banks reducing ability to buy new houses which put builders out of business by 2009 at which point house prices started to rise because demand outstripped supply, up until about 3 or 4 years after house prices got high enough to entice people to start training to be builders again.
Exactly, can't believe the RBNZ would talk about no need for DTIs as the market is going down. DTIs are to stop prices getting to stupid levels relative to incomes. They aren't something you apply after the prices are too high. You have them running all the time to stop prices taking off.
JC - I think the idea is to prevent another bubble forming.
I think that would only be possible with wholesale credit creation and the sheeple borrowing and spending like drunken sailors. Housing stock will have to go to 5-6x GDP. That might be a record in terms of developed countries.
Two different DTI levels for investors and owner-occupiers - hopefully investors having lower DTI ratio (4-5 max with a sinking lid to 3 or so) compared to O-O ratio (6-7 start with a sinking lid if over 5 years to 4.5-5 max). That would go a long way to improving affordability by constraining prices but will also annoy anyone intending to sell as they may never pass their 2021 peak (hypothetical) sale values in their lifetime.
So from peak we may see a 40-50% fall... then DTI and RBNZ 2-3% inflation band....
How old will you be in about 24 years HW2?
The rule of 72 can help you quickly compare the future of different investments with compound interest. The calculation can help you visualize your money. For example, an investment with a 3% annual interest rate will take about 24 years to double your money.
Ireland instituted DTIs in 2015. House prices have only trended up since.
It's at odds with the bulk of the views here about what people think DTIs do for house prices and affordability.
If you couldn't buy that house in 2021, you're probably less likely to in the 2030s.
The Irish economy was borked between 2007-2011, so you shouldn't expect house sales to be healthy in that sort of environment. Nor in 2023. So there's two things people are cross debating:
1) DTIs have a positive effect on house affordability (they don't)
2) House prices are effected by periods of economic downturn (they definitely are)
Except real world experience of DTIs hasn't resulted in that. Instead it just constrains supply further and reduces people's ability to afford whatever homes are available in the market.
Unless there's a fundamental change to supply, it's all re-arranging deck chairs.
Just as this crash was baked into the system by previous policies, the point of discussion should not be so much about what is happening now, but what we want housing affordability, and the economy to look like at the bottom of this crash and beyond.
As DTI's are directly linked to the median income ratio, this has the ability to set the median permanently at a far lower level, ie no hit the bottom and rebound to repeat the speculative cycle all over again.
But, without the resetting of land policy, immigration, inflation to wage growth, where people's retirement income is going to come from since their housing equity is toast etc, then guessing what will actually happen are worse odds than going to the casino.
It's a good idea to keep tabs on the median multiple page on the interest.co.nz site.
https://www.interest.co.nz/property/house-price-income-multiples, and for a contrast look at the bottom of the page and the difference between Queenstown, and Invercargill, both in income and median house price ratio.
Should we stop thinking that our equity in our house is anything more than the ability to not service that portion of incurred interest? Too many people live beyond their means because they think their home ownership is a money fountain. Pay your mortgage off, stop overspending on cars, holidays, and private schools...etc. Save some cash and invest the rest.
Both you and Juzz are missing the point.
Because you need a roof over your head, that comes before any other ability to invest or save.
And the point is NZ housing is approx. 30 to 50% overvalued, ie you are paying the greater part of your mortgage for nothing, especially if that portion disappears in a crash but your debt is still locked in.
Nurses and teachers etc. wouldn't need pay rises if housing was more affordable. People would have money to spend on other things. What these things are is another question entirely, but it is all theoretical for most people if it all is going on non-value-added debt servicing. Ideally of course, and most people would put most of it into savings, health, education, etc.
But the real question as you allude to is, IF you had that extra money to invest elsewhere, where would you invest it that was not real estate linked, or in an emerging asset class and all the associated risks? Just look at what has happened to the value of many people's KiwiSaver.
Not sure we disagree, with median multiples pegged lower, you pay off your smaller mortgage sooner, to invest elsewhere. People that have invested in housing recently expecting a rock solid safe as houses retirement investment, are probably wishing they did go to the casino. At least you can't get into negative equity at the casino.
Trouble is that real investing takes education, busines nous (ability to read financials etc) and energy for lots of research...
.. whereas investing like sheep in house price growth and superannuation funds takes zero brainpower (is why the elite and marketers have found it so easy get people to invest in something that was always false).
This is funny.
40 years ago all lending institutions used Debt-to-Income ratios. It was the first measure they applied. It was a way to establish whether the borrower could in fact pay the instalments. It was effectively a 'first cut' cashflow analysis.
Only after that did the lending institutions use a Loan-to-Value Ratio to establish how safe their money was in the event of a default.
Once the lending institutions were satisfied those two measures were within the realms of sanity they would drill down into the DTI figure to arrive at a Debt-to-Disposable-Income ratio. I.e. an analysis of spending patterns, i.e. a more detailed cashflow analysis. These were highly dependent on how the borrower lived and spent. (I saw one for a Chinese market gardening family - Talk about frugal living!)
Another thing was that the preferred term was 20 years or less. You needed good reasons for 25 or 30 years. Why 20 years? Two reasons. Firstly the borrower pays back capital faster meaning a 'black swan' event in five years, or every ten, was less of a problem for lending institution and borrower. Secondly, if the borrower did have a cashflow problem, e.g. babies!, their loan period could be extended to reduce instalment amounts and then refinanced back to a 20 year loan when cashflow improved.
Funny how were now talking about what lending institutions did 40 years ago under their own steam but now it has to be forced on lending institutions.
Bang on.
Trouble is that humans are greedy and left to our own devices we will take what we can today and ignore med to long term consequences.
The banks simply did that. The government and rbnz who should have been watching for risk did the same.. simply started peeling back on risk management and controls.. and after a while they realised that nothing bad had happened and the economy had boomed and people seemed happy so they peeled back more controls.. and more.. and then printed money and still everyone was happy and so on and so on.. until.. one day.
BOOM !
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