Reserve Bank (RBNZ) Governor Adrian Orr has hinted debt-to-income (DTI) ratio restrictions on banks' mortgage lending could be deployed with relatively loose settings when the option becomes available next year.
The central bank lobbied the Government to approve the addition of a DTI tool to its macro-prudential toolkit for years and was eventually given permission by Finance Minister Grant Roberson in 2021. Some politicians were reluctant to back DTIs, fearing they could prevent first home buyers from getting mortgages.
Now, the regulator has permission to use the tool and has told retail banks to be ready for it to be deployed by April next year.
However, the RBNZ’s leadership is coy about whether they will push the button or not.
Assistant Governor Christian Hawkesby said no decision had been made on whether a DTI ratio rule would be put in place, although preparation work had been done.
The RBNZ plans to consult on possible implementation and initial settings during the first quarter of next year, ahead of the ‘be ready’ date given to retail banks.
It said the restrictions could take effect from around mid-2024, if implemented.
Behind the scenes work has included looking at how the ratio would interact with the existing loan-to-value ratio (LVR) restrictions on low equity mortgage lending, and how it might affect first home buyers.
Governor Orr said, almost unprompted, that a DTI ratio could first be set up with loose enough settings that it doesn’t restrict buyers' access to credit. The current LVR ratio rules weren’t the “constraining factor” on people wanting to borrow, it was more about whether they could afford the higher interest rates.
“The debt-to-income ratio can be put in place, but that doesn’t mean it will be binding, initially,” he said at a press conference on Wednesday.
“But the fact they are in place, is that when they do become binding, its for the right reason — slowing excesses in the economy," Orr said.
In a regulatory impact assessment released in April, the RBNZ acknowledged the housing market was “currently in a downturn” and therefore there was no “immediate need to implement DTI restrictions.”
However, the housing market has stabilised since then and most regions have begun to see prices increase despite high interest rates suppressing buyers’ borrowing capacity.
The incoming Government is expected to pass property-investor friendly legislation that could push up prices, while high migration and building costs threaten to trigger a fresh housing crisis. It is possible the RBNZ could choose to put DTI restrictions in place in anticipation of future risk-taking in the property market.
DTI restrictions will set limits on the amount of debt borrowers can take on relative to their income, thus limiting the amount of high risk mortgage lending that can take place.
The central bank hopes this will reduce the chances of a housing related financial crisis in the future. It may also allow the regulator to loosen its LVR restrictions.
How the new rules impact first-home buyers will depend on the exact settings chosen, but investors tend to borrow at higher DTI ratios on average and would likely be most affected, the RBNZ says.
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