RBNZ 'seriously considering' debt-to-income limits

RBNZ says increasingly concerned about Auckland housing resurgence; says seriously considering new Macro-Prudential measures to improve financial stability; looking at debt-to-income ratio limits

11th May 16, 12:00pm by Bernard Hickey

By Bernard Hickey

Reserve Bank Governor Graeme Wheeler and his Deputy Grant Spencer have given a much starker warning about the potential for new Macro-Prudential controls on lending to reduce the financial stability risks growing in the Auckland housing market.

Speaking at a news conference after the release of the bank's half-yearly Financial Stability Report (FSR), Wheeler and Spencer said they were "increasingly concerned" about the Auckland housing market and were "seriously considering" introducing new lending control measures, including a new Debt-To-Income (DTI) ratio control.

The FSR itself had a much blander comment about "assessing whether further financial policy measures were appropriate," but Wheeler and Spencer were much more direct in their comments in the news conference.

They said a potential DTI control, which are used in Britain, was just as likely as a third round of Loan To Value Ratio (LVR) controls and it was possible the controls could apply nationally, as well as to Auckland.

Wheeler and Spencer did not put time-frames on when the new controls could be proposed or introduced, but said the bank was actively analysing the issues and looking at whether to renegotiate the bank's Memorandum of Understanding on its Macro-Prudential tool kit with Finance Minister Bill English.

"I think it is fair to say we are becoming increasingly concerned about the Auckland housing market," Wheeler said.

"That house price inflation looks like it has accelerated in February and March. We hope to see the REINZ data this afternoon and investor activity is driving a lot of that market,"

Wheeler said in the past three months 42% of Auckland housing transactions were driven by investors, while for the rest of New Zealand it was about 40%. He said the LVR policy had been effective reducing the percentage of the loan book that was highly leveraged with an LVR of over 80% from 21% in 2013 to 13% now.

"So will we look at further macro-prudential? Yes, we are," Wheeler said.

"We need to do more analysis. We need to have discussions with the Finance Minister, but it's fair to say that we're seriously looking at Macro-Prudential."

Specifically asked about debt-to-income ratios, he said: "It is something we would look at. It has been successful in other countries, particularly the UK, which has recently adopted debt to income ratios."

The Bank of England limited loans with a multiple of more than 4.5 times income to no more than 15% of mortgage flow from October 1, 2014, as detailed in this policy.

Currently around 35% of owner-occupier mortgage lending in New Zealand is done with debt to income multiples of more than 5, while almost 60% of investor lending is done with DTIs of more than 5, as detailed in figure 5.15 of the FSR (page 45).

'It works elsewhere'

Wheeler said the Reserve Bank had been collecting data on loan to income multiples from the larger banks, and would now look to collect it from the smaller banks as well.

Spencer said a debt-to-income limit would be a new tool and would therefore require a new negotiation with Bill English to include it in the Bank's Macro-Prudential tool kit, which currently includes LVR limits, Core Funding Ratio (CFR) limits, Counter Cyclical Capital (CCC) Buffers and sector capital weighting adjustments.

"We've been looking at the debt to income issue and we feel that's definitely a relevant area and it's an instrument that's been used in other countries," Spencer said.

"It's not quite as the same state of readiness for the other instruments we have," he said.

Later Spencer denied, therefore, that new LVR controls were more likely than debt to income limits.

(Updated with more details)

You can receive all of our property articles automatically by subscribing to our free email Property Newsletter. This will deliver all of our property-related articles, including auction results and interest rate updates, directly to your in-box 3-5 times a week. We don't share your details with third parties and you can unsubscribe at any time. To subscribe just click on this link, scroll down to "Property email newsletter"and enter your email address.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

55 Comments

by murray86 | 11th May 16, 12:16pm 1462925770

Let me see now, who would likely have the highest debt to income ratio? Oh yes that's right young, first home buyers forced to take out 30 - 50 year mortgages just to get into their own homes and avoid paying rent. Why not just pass a law that bans them? It's simpler than death by a thousand cuts. Dumb and dumber. When are they going to specifically target investors, he is admitting they are the biggest single factor in the markets?

by sferris | 11th May 16, 12:27pm 1462926469

I think its a good idea. Its more likely to hit investors who are using equity on one property to borrow against another, and just having enough yield to pay interest on the new loan.

The debt to income ratio eliminates the house debts/prices relationship with interest rates, as the debt is not only limited by the interest repayments but also how much you earn (which won't fluctuate with interest rates).

by J.C. | 11th May 16, 12:40pm 1462927231

I think that the RBNZ showed the NZ public today who really wears the trousers in the new economic order. Central banking has become nothing more than a sideshow. Elected and imposed govts have a holy alliance with the private banks and ultimately call the shots, with the central banks running behind, tongue hanging out, panting away. The real interesting thing is the power struggle between liberal democratic govts and the private banks. This no more obvious than in the Anglo Saxon world, specifically the U.S., UK, Australia, Canada, and NZ. One advantage we do have is that our political-cultural hegemony has hijacked monetarism.

by Ralph | 11th May 16, 1:08pm 1462928896

I am not sure that's changed though. Govt license banks, banks provide loans to business, business pay tax to govt on a cash now basis. It's been that way a while now.

by dictator | 11th May 16, 12:41pm 1462927310

This may also push investment properties away from negative gearing. If you are losing money on a property that's reducing your income, and if you were to buy a new property that also lost money that would shift the debt to income ratio.

There are a fair number of property investors that would be affected by something like this. That includes those that have geared for $0 income from their pool of properties. If you add more debt but you income in unchanged then that would impose a hard limit.

by murray86 | 11th May 16, 1:01pm 1462928463

Trouble is it still smacks hard at First Home Buyers. Despite the points put forward above, i still feel it is too crude and broad a brush, and there are many investors that will just shrug, and carry on.

by Justice | 11th May 16, 1:02pm 1462928547

Did the RBNZ state that proven "equity" would not be taken into account as income?

by Zombie ponzi | 11th May 16, 1:52pm 1462931530

Quick worked example (for my own interest);
$1m Auckland property - current investor LVR policy requires 30% deposit, therefore $700k of borrowing.
Let's be generous and say it rents for $700pw, at 5x gross income that is max borrowing of $182k. Put another way, weekly rent would need to be $2,700 to allow the $700k to be borrowed.

Sure, the investor might have personal income, but across 2-3+ properties this would be stretched very thin in most cases.

Am I missing something? This would significantly slow speculation in property for capital gains. Prices would fall significantly.

by sferris | 11th May 16, 2:05pm 1462932351

Exactly. It will punish the investor more than the home owner, which is good, as it is not based on how much you are spending living in the house but how much you earn (assuming costs of rental are approx. 30% of someone's total income, this means that the home owner can borrow 333% as much for the house compared to the investor, excluding the investors salary. Less leverage for the investor = lower returns.).

It should slow the ability to use equity to reinvest in new houses (which is a major risk if house prices come down, as all of the equity is unwound pretty quick).

by sammnz | 11th May 16, 4:08pm 1462939680

It's not going to address housing affordability though which is a big concern, the RBNZ is concerned about itself

by keyo_ | 11th May 16, 12:32pm 1462926744

Hopefully any new rules are applied quickly and apply to all regions. Sadly it won't do much in areas affected by fresh "student" money.

by Justice | 11th May 16, 1:03pm 1462928638

Honestly don't hold your breath, you will expire

by Rumpole | 11th May 16, 12:32pm 1462926751

Wow, I have been blogging this for years Wheeler must have read my suggestion and will probably claim it as his own idea.

by sferris | 11th May 16, 12:49pm 1462927778

Yes, because I am sure you were the first in the world to consider this type of thing...

by hmmmmmm | 11th May 16, 1:18pm 1462929511

hahaha nice claim mate - why not be the inventor of debt to income ratios ... in your 'blog'

by Smalltown | 11th May 16, 1:02pm 1462928553

Just do it already bro and stop waffling on. He has been warning us about the danger forever. I suspect the jkitis where the main sympton is to do nothing is becoming contagious.

by Justice | 11th May 16, 1:10pm 1462929011

Mate, they are full of it. Weasels words, arms and legs painted on. They pretend like they are spectators with no control or influence themselves. All they care about is banks. Why? That is their mandate. Just more state the obvious and continue doing f all but protect banks from themselves. Everyone else can go to hell a far as the RBNZ is concerned.

by positivelywallstreet | 11th May 16, 1:53pm 1462931596

I think they fear the banks, including the IMF, more than they fear the electorate.
Not the first time we have been screwed by international banks.
Come to think of it, we generally get screwed...
Still the sailors are doing allright

by Justice | 11th May 16, 7:20pm 1462951239

I do also. Let's face it, Governments lost this battle decades ago starting in 1913 with the creation of the US FED.

by hmmmmmm | 11th May 16, 1:25pm 1462929918

They don't have the ability to enforce the debt to income ratios yet - they agree on their available prudential tools with the finance minister. Once they get them in their arsenal I hope they'll use them!

by Plutocracy | 11th May 16, 1:32pm 1462930354

What happens when Billy says 'no dice'?

by Smalltown | 11th May 16, 3:46pm 1462938391

Or "lets wait and see"

by waymad | 11th May 16, 1:36pm 1462930599

Raises the spectre of the 'liar loans' (falsely declared 'incomes') which were a big feature of the US experience. Read back on http://www.doctorhousingbubble.com for the whole sordid story.

Where there's a demand.....mobile mortgage-truck shops, with prefilled doco?

'Just sign 'ere. little FHB, no need ter worry aboot the Fine Print'......

by ObeseBallerina | 16th May 16, 3:44am 1463327060

Have you tried getting a mortgage lately? The bank wanted to call my payroll dept to see if my income was real. You are talking about what happened 10 years ago. Things have changed considerably since 2006.

by Boatman | 11th May 16, 2:12pm 1462932741

This is another hare - brained plan, hatched in desperation , that DOES NOT address the problem or fundamentals of demand and supply.

Did Graeme Wheeler actually study economics ?

How on earth will they ever manage this ?

Does the proposed loan to debt ratio apply to EVERYONE ? Including loans from parents , Uncles and Aunts who lend money to their families to help them buy their first home ?

Many people have debts to the IRD or for child maintenance , how are these going to be counted in ?

How is he going to measure this , when people don't always disclose their exposure to all financial institutions, quite apart from what they owe family.

Peoples financial position can fluctuate wildly in a short timeframe , does he propose managing this on an ongoing basis ?

How does he know the real financial position of a migrant , almost all of whom come from places where their net worth is kept very secret . ( India and China in particular where the citizens are either afraid of or distrust their Governments 100% )

by mfd | 11th May 16, 4:00pm 1462939253

The plan hasn't hatched yet, it's still being incubated. Your points about loans from parents/friends, overseas net worth etc are irrelevant in a debt-to-income ratio concerned with financial stability. Net worth isn't in the ratio, borrowing from family isn't any of his concern.

I'd be surprised if there was a need to keep up to date with people's situations, presumably it'll be assessed when people are asking the banks for finance and will be a snapshot at that point.

People failing to disclose existing liabilities, surely that's already a problem which the banks are very familiar with when doing their own affordability calculations for mortgages.

You seem very angry about this idea, which would address the problem of demand by taking a whole load of over-stretched purchasers out of the market. What's the problem?

by sharetrader | 11th May 16, 2:20pm 1462933202

maybe he has heard what others have been yelling from the rafters, cheap interest amd massive debts to buy assets are the whole crux behind the problem.
'Miracle' needed to save the world, because central banks can't, says BTIM's Vimal Gor
The reality remains that the world is overwhelmed with debt, so that would suggest that we would need to have low rates to make repayment easier, and to discourage saving.
"Ironically low rates spur further adoption of debt because of asset prices that are shooting skywards, and actually encourage more saving because income levels from the existing savings pile are too small to live on."
http://www.smh.com.au/business/the-economy/miracle-needed-to-save-the-w…

by Boatman | 11th May 16, 2:37pm 1462934249

Anyone remember the book 1984 in which Geroge Orwell described the government surveillance of each individual .Graeme Wheeler should read George Orwells book , which really stretched the imagination .

He is going to have to undertake ongoing surveillance of each and every one of us on an Orwellian proportion if he wants to understand our debt -to income on an ongoing basis .

From an accounting perspective , how will he account for people who have signed Personal G'tees for their businesses on leases , overdrafts , credit cards , vehicle finance , machinery and capital equipment , etc etc . These are not "personal debts " but they can easily become personal

Further to this , debt can be shifted around and many individuals own small business which Statements of Position show something called GOODWILL as an asset . That "asset" is attributable to the shareholder and its almost a thumbsuck number which has the effect of masking the real debt position of the shareholder .

Understanding each individual's debt is a huge cumbersome, costly and time consuming task.

by sferris | 11th May 16, 3:04pm 1462935894

Do you think that banks don't already assess the risk of the people they are lending to by assessing the other financing arrangements that they have? And assess their income and ability to repay?

As with LVR, the debt to income ratio will be at the inception of the borrowing, and possibly at any rollovers or refinancing.

A crude tool is better than no tool at all.

by tim12 | 11th May 16, 2:39pm 1462934341

Hare brained plan for a hare brained economy. This is the problem when interest rates are so low they don't compensate for the growing risks in the NZ economy. The RB can see this and need to come up with a plan to cool things down. The problem is that with globalisation we have lost control of our own economy. And what john Key calls much need foreign investment is only turning us into a casino.

by Boatman | 11th May 16, 3:00pm 1462935628

I agree with the commentator who reckons low interest rates don't compensate for the future risks to our economy .

People getting little or no interest income on their money are forced into taking risks they don't understand such as buying ordinary shares for the dividend stream , or worse , gearing up on property .

Quite honestly , if you asked me I think Graeme Wheeler has lost his marbles , we are facing a rout in commodity prices , frantic policy making in China , the US Fed , the ECB and JPN Central Bank , and he says benign things like " we are facing risks " to our financial system .

Hell , we know this and we need to understand what he and Bill English are going to do about it

by Craig | 11th May 16, 3:01pm 1462935689

Not a bad idea and fits their remit of financial stability.
Remember it is not RBNZ's position to control house prices and he is doing this in the absence of any policy from government other than hide and hope it goes away.

by Carlos67 | 11th May 16, 3:15pm 1462936507

Short memories, the banks used to allow you to repay a maximum of 33% of your salary on a Mortgage each week. You can guess the problem with this, even way back this removed just about everyone on a single average income from buying a house so eventually they threw it out the window and let you borrow whatever you wanted, it didn't matter as long as you met the weekly repayments.

by ian64 | 11th May 16, 3:18pm 1462936693

well, it depends on the ratio. I expect1 to 6 or 6.5 to keep things steady

by xelnaga | 11th May 16, 3:37pm 1462937865

It's 4.5 in the UK. I find it very unlikely they would go to 6.

by The Truth | 11th May 16, 3:43pm 1462938203

Debt is a fiction it is a man made piece of paper or lately a digital number on a screen we have now truely entered the age of digital fiat money.

When the crash comes which i predict 20 Oct 2017 on or before much of the fictional debt will be wiped away but the assets will remain abet at 30% to 50% off to those in the know.

Wealth is your cash flow a lot of investors have properties that produce no positive cash flow therefore those assets are a liability until sold at a later date for a profit.

The signal at the moment as to why people are investing is mainly for capital gains one the CG party comes to an end, then you will see a correction down as most people holding liabilities will rush for the exit doors.

by Ralph | 11th May 16, 3:52pm 1462938769

"Debt is a fiction"

Well yes, until you don't pay it and then the effect of that non-payment becomes somewhat more real than a fiction.

by Averageman | 11th May 16, 3:46pm 1462938399

Also has the spinoff that it would make people clearly declare their income at least at the required threshold. Great for the IRD. Might give a very clear picture of how much income is/was being washed against the debt ponzi over the last 10 years. Imagine...IRD to Ponzi investor...

"You are now declaring x as you income. We note that you have only declared a very small portion of that number over the last 5-10 years, but your property holdings haven't changed at all. Please accept this audit request". #would vote for that next time around.

by The Truth | 11th May 16, 3:48pm 1462938517

One has to understand what actually is going on.

1. The RSB is trying to create inflation and avoid deflation.

2. The Feb is printing money to create inflation and avoid deflation the problem is that most of the printed money is being used to purchaase assets which has caused a bubble, the original idea of printing money was to boost consumption and wages to create demand this has not happened.

3. Wages are going down inflation adjusted over 20 years

4. Sadly not only have we entered the age of digital fiat currency but more dangerously we have entered the new age on monitary enslavement.

by The Truth | 11th May 16, 3:53pm 1462938808

The 3% of house sold to chinese sounding names is BS.

I did a survey on 5 international students whom each one had bought 4/5 properties residential and commercial there ages where 24/26 one can only guess that huge amounts of students are being sent here not for education but to get and IRD number first then open up a bank account then start the flow of cash into nz which is ending up in the property market.

by The Truth | 11th May 16, 3:54pm 1462938871

Most Auction i go to there is no kiwis in attendance other than people with chinese sounding names.

by The Truth | 11th May 16, 3:56pm 1462939011

Two Friends of mine sold there houses recently only people with chinese sounding names ever came to view the properties the two properties were sold to people with chinese sounding names.

Some one in statistics is telling porkies on order from John Key whom in turn is being order by Beijing.

by Appreciating Assets | 12th May 16, 8:50am 1462999835

One of my friends was born in New Zealand and has a Chinese sounding name and has never been to China. What do you say about him buying a house for his family?

by Kakapo | 12th May 16, 9:06am 1463000761

That's why we need real data on nationality. So that we're not reliant on clumsy proxies like names, and so that innocent citizens don't cop the backlash.

by The Truth | 11th May 16, 4:01pm 1462939289

There is two much meddling by the GOVT and RSB, Quite easy to solve the problem.

1. All immigrants must by a new house built by Kiwis with kiwi products.

2. If you sell within 10 years 100% TAX.

3. Investors deposit 70% LVR 50% DSR 30%

The game can be stopped but what the worry is, is crashing the market and therefore cause mortgagee sales and wide spreed riots as there will be so many people who think they own there house will be out on the street.

by The Truth | 11th May 16, 4:05pm 1462939524

What is causing Property to escalate in price.

1. Too much immigration

2. International students come here to open bank accounts and start buying many properties.

3. Low interest rates

5. Slack lending and bankers having to meet budgets so they have a job at the end of the month.

6. Blind trust set up to purchase properties by overseas rich persons.

I am sure there is plenty more ways.

by The Truth | 11th May 16, 4:07pm 1462939667

There is more money to be made by making money work rather than working for money.

The whole market is full of speculators.

The market throughout the world is just one big casino play the game or end up under a bridge.

by Justice | 11th May 16, 7:24pm 1462951444

The "Truth" and "Justice" together again at last ! ;-) Joking, well said though your comments .

by The Truth | 11th May 16, 4:10pm 1462939857

The sad fact is that kiwis are being priced out of their own country becuase the GOVT has no forsight to protect its residents who have paid for and built this country to where it is today.

The euro kiwi is going to be sent down the same path as the maori where.

by The Truth | 11th May 16, 4:13pm 1462940034

The point is stay out of debt then it stays a fiction.

by The Truth | 11th May 16, 4:21pm 1462940476

Debt creation only brings forward spending today which one cannot afford.

Therefore with the 1000 trillion of oustanding debt there must be a lot of spending brought forward.

by dictator | 11th May 16, 4:25pm 1462940739

The usual solution is to increase inflation to devalue the debt. However there is little to no inflation, deflation in some areas. A debt is a debt dollar for dollar at the moment.

by Joe Public | 11th May 16, 7:02pm 1462950161

Great idea. Beyond belief that it wasn't already in the tool box just shows you how poor the government and the reserve bank are in keeping a lid on this housing bubble. Problem is will probably take 6months to a year by the time it's agreed and the banks go through all the delays they usually ask for.

All talk cant see any action before the election. TOO BIG TO FAIL

by dictator | 11th May 16, 7:47pm 1462952868

I've seen banks look at debt to income ratio but it doesn't seem to be something that is set in stone. I could imagine them applying it to investors as that's where it would have the most impact. That's something they won't want to do prior to an election though (unless unaffordable housing turns too many voters against the Government).

by Noncents | 11th May 16, 8:04pm 1462953857

None of the generic financial measures already applied or being considered will take the heat out of the market.

Everyone forgets - the RBNZ acts in the interest of the banks, the Government is "Meant" to act in the interests of the people. It appears everyone has acknowledged the problem, avoided the solutions, and are now trying to protect the banks when the inevitable happens.

Take this statement:
He said the LVR policy had been effective reducing the percentage of the loan book that was highly leveraged with an LVR of over 80% from 21% in 2013 to 13% now.
Has it impacted the market at all? No.
Has it reduced the banks exposure to default? Yes.

Talk about all the economic/financial solutions you want - but they wont fix this mess. Only actual physical restraints will cease the insanity.
- If foreign buyers are to blame - limit residential property ownership to Citizens.
- If investors are to blame - limit the amount of properties that can be owned.
- If companies/trusts are to blame - limit residential ownership to an individual.