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)
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