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Could the RBNZ look to a Bank of England style debt-to-income ratio to cool the runaway train of the Auckland housing market?

Could the RBNZ look to a Bank of England style debt-to-income ratio to cool the runaway train of the Auckland housing market?
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By Gareth Vaughan

Less than a month ago speculation was running hot in the media, and among some economists, that the Reserve Bank was poised to end to its "speed limits" on bank's low equity residential mortgages. As it turned out that speculation was misplaced.

How quickly things can change.

The talk has now shifted 180 degrees to the prospect of the Reserve Bank going back to its macro-prudential toolbox and fishing out an additional tool in 2015.

These suggestions are coming as the Auckland housing market shows signs of going on a renewed tear, evidenced by November's Barfoot & Thompson sales data, and Quotable Value's latest figures.

In recent days we've had Westpac's chief economist Dominick Stephens and ASB senior economist Jane Turner raise the prospect of the Reserve Bank introducing additional macro-prudential tools. And at we've had Squirrel Mortgages' John Bolton suggest this too.

Debt-to-income limits?

We know the Reserve Bank's working on plans to make banks hold more capital against loans to owners of multiple rental properties. Deputy Governor Grant Spencer has said the Reserve Bank is working on how to categorise a borrower as a residential investor, noting it could be based on the proportion of their total income that's coming from their investment portfolio, rather than the number of houses they own. This could make loans more expensive for property investors, and potentially harder to obtain.

This policy's likely to see the light of day in 2015. However, it's not a macro-prudential tool.

Aside from the LVR restrictions the three other tools in the Reserve Bank's toolbox are; The counter cyclical capital buffer, effectively banks holding more capital during credit booms; Adjustments to the minimum core funding ratio, increasing/altering the amount of deposits and longer-term wholesale funding banks have to use to fund their lending as opposed to shorter-term debt such as commercial paper. (Across NZ registered banks the core funding ratio is currently running at 86.3% against the minimum requirement of 75%). And; Sectoral capital requirements, or increasing bank capital in response to sector-specific risks such as in the housing or rural sectors.

But there's at least one other option not in the toolbox that the Reserve Bank may look at. That is introducing something to shore up borrowers' debt-servicing capacity.

In the Reserve Bank's May 2013 final macro-prudential policy position the central bank noted areas of regulation "not in scope" for the "base framework", but that "may form part of the bank's future work programme" included: "The case for incorporating debt-servicing capacity into the macro-prudential framework."

The Bank of England this year introduced a rule where no more than 15% of banks' new mortgages can be loans equivalent to more than four-and-a-half times a borrower's income. This move was especially aimed at the London market.

Although in its submission on the Ministry of Business, Innovation and Employment's Responsible Lending Code the Reserve Bank appeared lukewarm at best to the idea of strict debt-to-income limits, it was also unenthusiastic about LVR restrictions prior to Graeme Wheeler's day. Here's what the Governor's predecessor, Alan Bollard, thought of LVR restrictions.

Limiting the volume of credit in the economy

One local fan of the concept of debt-to-income limits is New Zealand Institute of Economic Affairs principal economist Shamubeel Eaqub.

"I would like to see a pragmatic approach in terms of thinking about maybe a loan-to-income ratio," Eaqub told in a Double Shot interview.

"It limits the amount of credit available in the economy and the bank's still choosing who is good risk and who is poor risk. The second thing that I think would have a much bigger impact is actually getting banks to hold more capital, because again that will limit the amount of credit in the economy," Eaqub said.

"The final leg, which is probably the most painful, is raising interest rates. We've already see the Reserve Bank do that this year (four times) and we've seen that it has had a big impact in terms of provincial economies, the rural economy in particular and non-housing businesses. But if the housing market starts to take off again I don't think the Reserve Bank will have a choice but to clamp down pretty hard. Because we know that house prices are so detached from fundamentals a sudden slowdown could be really quite painful," Eaqub said.

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The point that the media seems to miss is that the money flowing into NZ is flowing through NZ residents.  Family connections are strong enough that money can flow from an Aunty to a Niece with no paperwork.  Restrictions on non-resident investors will not impact on this and would be a waste of time and hold political value only as been "seen to be doing something."

If the RBNZ focuses on number of properties this will also not work for the same reasons.  It is very easy to come up with "borrowers of convenience." Properties are owned by parents, brothers, sisters, cousins, even close family friends.

Our issues are not with non-residents.

The massive increase in values in Auckland has created equity that can be leveraged and buyers are not considering yield when buying.  The focus is purely on capital gain.

Here's the Gold.

The non-rental incomes to support the borrowing are often weak.  If you combine that with low yielding properties, then it becomes increasingly difficult to borrow more / leverage to buy more properties.  Investors hit a ceiling.

The Reserve Bank can very easily influence this as follows:-

1.  Do not allow NZ banks to including overseas income for servicing unless the overseas income relates to a NZ citizen working ownerseas.  (NZ debt should be able to be serviced by NZ income.)

2.  Increase or decrease the minimum servicing rate that banks must use to test a borrower's ability to service the debt.  Most banks test debt based on 75%-80% of rent and 30 year P&I on a servicing rate of between 6.40%-7.50%.  (If the rate used had to be say the average 2 year rate through a full interest rate cycle then that would set a benchmark of say 7.50%.


These two simple measures could be implemented quickly and easily as they are credit policy settings and would have a rapid impact on the ability of all speculators to leverage up.


but the banks do not wish to lend less per borrower or in aggregate - ever ever.

and while lending valuation is based on comparative sales, the last man/or agent in raises the bar of all.

from what we have seen, over the last yr of so in AKLD most houses have earn their owners more spendable cash that the owners pay slip.

we think putting a brace on a paper step in the punter to loan to bank flow is not first best, ppl caaan create paper entries.

why look at letting only FHB be able to offer full recourse to loan, all other residential property secured lending on a non-recourse basis.

lets see how brave our bankers are - bring back the name lend - if its good enough for the USA, if not, why not....



Non-recourse loans - haha - ain't never gonna happen - because the NZ Bankers Association would squeal like stuck pigs - you can't do that - it would take us 10 years to re-arrange our systems and procedures and paper work


Straight from the horses mouth

Is this John Bolton of Squirrel Mortgage Brokers? - the inside man?

He who should know what's going on


The massive increase in values in Auckland has created equity that can be leveraged and buyers are not considering yield (read rental yield) when buying.  The focus (read intention) is capital gain.

Hello IRD - where are you?


IRD is lurking in the shadows, ready to pounce:


Which ever way you play it, it will be the poor, and first home buyer that will be hit the hardest.

Suits me.


Start by every loan being considered at commercial rate.

Then allow only FHBs and other owner occupiers the reduced rate.

If an OO is able to use equity to borrow at the reduced rate for one rental, that would be fine provided the loan is held against security of the self occupied one.

Solves the whole problem of who is a true landlord with two or more properties.


Yep, Default commercial loan type with exemption on (pre)approved application for owner occupied or first property would be cool, couple it with the no-recourse suggestion on those commercial loans to shove the risk to the bankers where it belongs. Is that not their chosen profession?, lending at assessed risk rather than just clipping the ticket with bulk money parking and shuffling the entire risk to the victims. Nice work if you can get it, and getting it they are.

A very separate problem exists for in-flow money which is being spirited here away from other juridictions either as a safe stash of out of country money for non-residents via resident relations, or as imported retirement provisions. These are not going to be affected by internal banking controls such as LVR or income to debt directly, but maybe by preventing the locals trying to keep up with them it may just relieve the thermal runaway thing.