Acting Governor Grant Spencer says upcoming review of RBNZ's macro-prudential tools should add 'carefully designed' debt to income or debt servicing tool

The upcoming review of the Reserve Bank's macro-prudential toolkit should give serious consideration to adding some sort of debt servicing ratio, says the Reserve Bank's Acting Governor Grant Spencer.

The Reserve Bank's five year-old macro-prudential toolkit will be reviewed this year with Treasury as part of the Government's review of the Reserve Bank of New Zealand Act. Spencer, who is due to hand over the reins to Adrian Orr later this month, says he'd like to see the four tools currently in the toolkit retained, with a debt to income (DTI) or debt servicing instrument added.

"You will recall that the [Reserve] Bank consulted on including a DTI instrument in the toolkit last year. That process was overtaken by the general election and a decision on inclusion or otherwise was deferred to the upcoming macro-prudential review. The DTI is a natural complement to the LVR [loan-to-value ratio tool], focused on reducing the risk of borrower default. Many macro-prudential authorities overseas view some form of debt servicing ratio as a key anchor and safeguard for macro-financial stability. The review should give serious consideration to adding such an instrument to the toolkit," Spencer said.

His comments came in a speech to the Institute of Finance Professionals New Zealand (INFINZ) in Auckland. Spencer said the views expressed were his own, and not a formal Reserve Bank position.

The four tools currently in the Reserve Bank's macro-prudential toolkit are LVRs, the counter cyclical capital buffer, the core funding ratio, and sectoral capital ratio. Restrictions on high LVR residential mortgage lending have been in place since 2013. None of the other tools have yet been implemented by the Reserve Bank in a macro-prudential context. (See background on the four tools here).

Whether the Reserve Bank could get the government backing it requires for a DTI ratio tool remains to be seen. When in opposition last year Finance Minister Grant Robertson said Labour didn't support DTI ratios for first home buyers. 

Meanwhile, last year Spencer described a DTI ratio above five as "pretty high."

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49 Comments

its crazy that we dont have one, when its obvious that high debt led to the GFC..

Nope, fraud, over building, unregulated shadow banking/derivatives, MBS and liar loans led to the GFC.

I think you mean unregulated bank lending only managed by greed and lending bonuses. Like junkies they can't self emulate and need rules enforced on them. Lending home owners at 9-10 times is and example.

Our strategy to this for years has been just to reduce OCR to improve affordability and stimulate growth, if it was a bad strategy it's spilt milk under the bridge now.

Quite right the tool is appropriate interest rates too late now

A DTI would actually give them the freedom to lower the OCR (if needed) without worrying about blowing bubbles in the housing market.

We are still at the stage where home buyers need to be protected from themselves.

We are still at the stage where home buyers need to be protected from themselves.

I disagree. Nobody needs to be protected when asset prices like houses are elevated and rising. The ruling elite appears to believe that it can control asset prices like a puppet on a string.

Why can't the banks apply their own? Why should the RBNZ be concerned? This is private business doing commercial activity. If the risk is too great, why not put deeper regs in place to govern bank behaviour?

If banking behaviour places the economy at risk a DTI (and for that matter LVRs) is just tinkering at the edges and not really addressing bank behaviours at all.

Greed and profit bonuses. Self regulate...really?

It used to be like that right up until the Lange government reforms. The RBNZ kept bank lending in what was commonly known as a corset. Lending prioritised mainlyprimary production, industrial. Housing lending was so tight that the large trading banks (then five in total) had to open savings bank divisions to accommodate it. When all that was then relaxed the banks went at it hammer & tongs. Collateral & such like just flew out the window. Very big losses accordingly, think BNZ. Afraid to say the pendulum never settles somewhere
sensible, like in the middle.

Worthy to note though that in the seventies there was still a housing boom, to the point that the Kirk government of the day, introduced what was known as the speculation tax. Anybody know what happened to that? Assume Muldoon wiped it out.

You've somewhat hit the nail on the head. The distortions are because of the vastly lower risk-weight given to housing lending vs business lending (incentivising banks to write screeds of mortgage loans but choking off the real economy), and the fact that bank reserve requirements in general are too low. Either of those changes would be a massive initial hit to bank profitability, so never make it past draft internal discussions.

Given that New Zealand has no deposit insurance scheme, i'd say the banks are massively under-regulated. The problem is that the shareholder lobby is louder.

"The distortions are because of the vastly lower risk-weight given to housing lending vs business lending (incentivising banks to write screeds of mortgage loans but choking off the real economy"

Totally agree.

The government should legislate to make all mortgages non-recourse, i.e. you can walk away from the loan. This would substantially shift the risk profile.

I see absolutely no justification for recourse mortgages at all. Why should you be saddled with debt from a mortgage gone wrong for life - its absurd.

Under bankruptcy it's gone in three years

The RBNZ is concerned because they are responsible for supervising the banking system - they are the people controlling the bank's behaviour because history shows you cannot leave this up to the banks themselves. Here, they are asking for another tool to allow them to perform this function.

I'm not sure what your argument actually is - should the RBNZ butt out, or should they be significantly beefed up?

Banks were de-regulated back in the late 80's and were given a free reign to create easy and cheap credit. There lies the problem because asset prices have increased dramatically since then and a low wage economy will eventually hit a debt ceiling which will deflate prices back to within local income ability to service the loans. That is, if the banks don't collapse first.

The banks did use to have their own. At the BNZ you could only borrow 3 times your annual income back in the 90's when I first looked at a loan. Its easy to see why they dropped this, even back then I could not afford to buy a house.They dropped this because the house prices just kept on going up and secondly they don't care how much you borrow as long as you can make the repayments.

Its another blunt tool ... a multi -tool in fact ....also is a double edged sword, because residents and citizens with links to Asia are borrowing money at 2% in Hong Kong or Tokyo and buying property here not only have a financial ( cost ) advantage , they also dont have to have a 20% deposit.

We are actually kneecapping our own people , and removing hurdles for for the likes of Augustine Lau to wreak havoc on our small market .

What we do need to understand is , are these measures in place to protect Banks from themselves or ordinary Kiwis from excessive debt levels ?

Leave commercial and business investment wide open, just fence off speculation in domestic housing. Why cant they limit purchase of existing residential assets to money earned in NZ - i.e. if its a $2m house you need to have $600k of tax payments checked off by the IRD?

Because of how impossible that is to regulate.

Its another blunt tool ... a multi -tool in fact ....also is a double edged sword, because residents and citizens with links to Asia are borrowing money at 2% in Hong Kong or Tokyo and buying property here not only have a financial ( cost ) advantage , they also dont have to have a 20% deposit.

Really? My prior employer was a Japanese corporate...in Japan. Banks were throwing mortgage opportunities at employees for property....in Japan. Perhaps you know something different, but Japanese banks are notoriously conservative for lending, particularly offshore investment or speculation into houses.

@ JC .... ever heard of Mrs Watanabe ?

Japanese banks will lend you money against assets or income in Japan , and the price of a 25m2 room in Tokyo is about the cost of a house in Greenhithe

HSBC is open about lending money to its Asia -based clients to buy houses here at as low as 1,75%.

@ JC .... ever heard of Mrs Watanabe ?

Japanese banks will lend you money against assets or income in Japan , and the price of a 25m2 room in Tokyo is about the cost of a house in Greenhithe

Nonsense. "Mrs Watanabe" refers to the Japanese housewife who spends some of her time trading currencies online or buying foreign currency deposits through Japanese retail banks.

Furthermore, there are probably more 1-room apartments for sale under NZD120,000 in Tokyo than there are properties for sale in the whole of NZ.

"Mrs Watanabe" was commonly invoked in relation to the carry trade which has wilted a little this decade. Or last decade.
And your memory of anecdotes re Japanese real estate, well you'll be pleasantly surprised if you actually look at the housing market these days in Japan - even Tokyo. Very affordable, even in absolute terms, compared with Auckland. I should mention a good friend of mine buying standalone 5+ brm houses in central Osaka for equivalent NZD90k to convert to Air BNB cash machines.

Try rocking up to the BNZ and asking for a loan to buy a house in Kazakhstan. The bank will demand a higher interest rate to compensate for the foreign exchange risk. No-one is getting those sorts of interest rates for NZ house purchases.

Bring it on, reckon this should be on the table for the RBNZ 5 years ago. Leveraged Specuvestors watch closely, the taste of squashed advo and latte wont taste as good with a belly full of Mylanta and Pepto Bismol.

The cow has bolted.DTI could only be introduced after a collapse in prices.No sane Australian bank is going to put their hands up for a DTI ratio unless its two digits.

Which is why RBNZ needs to make it a requirement for residential investment lending in NZ. On a positive note it will fix the crappy yields.

The yields are fine? Ever look at the yields on stocks?

Disagree, but you are right stock yields are mad to. Wonder is crazy loose printed money supply has a role there as well. At least shares have greater liquidity.

Banks aren't sane. Which is why APRA have intervened.

Exactly the banks make money on LOANS so if try and cut off their customer base you have no chance. The banks do not care how much they lend you, as long as you make the repayments on schedule you could be living on baked beans and freezing to death in the winter, they don't care.

I think there should be DTIs introduced now at something like 5.5 or 6

Currently banks have tightened up and there probably aren't a high % of loans above that rate at the moment anyway. But it does draw a line in the sand and protect people from interest rate hikes and forced changes from interest only loans, in the future.

Currently if interest rates were to rise by only 2% there would be a huge impact on a high percentage of borrowers.

The added benefit of DTI is that it tags House prices to incomes which will avoid bubbles in the futiure

History has told us that a DTI of 33% of income after tax is a normal and healthy debt ceiling, not 50-55% of total income as you suggest. There isn't much room for movement at this high level of DTI, which is why we should be very worried about all the interest only loans that are now starting to mature and are being moved onto principle and interest payments which in some cases means doubling the mortgage repayments! How many realistically will cope with that surprise?

Yup, it's what my grandad told me, it's what the French mortgage rates are set on, 3/1 that's your lot, if you owe more than that they won't touch you with a barge pole.

That is how it was when I was still in the banking industry too. I left at the end of 2006. Thankfully I escaped the collapse of our finance companies post GFC, but I still remember trying to warn our customers about the risks as they left us in droves, chasing the higher more riskier interest rates which were all based on short term consumer purchases like big screen tv's etc... When the downturn hit and people started loosing their jobs, they couldn't repay their debts owed to the finance companies and their investors lost big time!

Just to clarify the two DTI's being talked about here and to avoid any misunderstanding.

The two DTI's

1) total debt to gross income ratio
2) total debt service payments to after tax income ratio

The RBNZ is referring to the first calculation and Governor Spencer last year said 5.0x was pretty high. They use this calculation in the UK banks.

TainuiBabe is referring to the second calculation, where 33% is deemed to be healthy.

Yes thank you. I should have made that more clear.

As much as I'd like to see these brought in, Didn't Labour say they weren't in favour of these? National certainly were openly opposed to them. Then again this was all before the election so who knows what their positions are now.

It might be a poker hand being played. Never show all your tricks!

Debt to income doesn’t work for property investors and this is the problem!
It will work for owner occupiers but if they brought it in in Auckland there would be very few buying property in Auckland if it was at 6 times.

Investors are capable of borrowing and servicing debt at a helluva lot higher than owner occupiers.

We have a large annual turnover from rents and we own far more of our houses than the Banks do.

Our multiple is higher than 6 and yet our Business Bank Manager says that we are his safest customer and servicing is never going to be a problem.

Each rental property income we have doesn’t each have to service our own living expenses.

I suspect that they will have to exempt first home buyer owner occupiers to some extent, but there is a lot of small time speculators where this will be a very big issue #equitymargincall.

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Yeah, that really isn't the problem, the problem is that banks have lent people like you money that you can't technically afford. You've used equity in a house to buy another house and used equity in that house to by another house and so on, you are the problem. Whilst doing this you've prevented FHBs from buying a house, I bet all of your houses are homes that you would have bought as a FHB, you haven't got a single executive home, you would never have had the money to buy multiple houses if you had had to save a deposit as FHBs do. DTI will prevent people like you from hoarding houses, and FHBs will actually have a fair crack at owning one home and building a foundation for themselves.

F'ing oath!

Nicely described, but while the behavior is self interested, it's not necessarily malicious.

But it's a salient point to identify that the median (or even average) house price is out of whack with a similar measure of h'hold incomes, probably more so than ever. And that is usually what you see in asset bubbles.

Out of Australia - a little frightening as NAB's introducer program has generated $24 billion of home loans for the bank between 2013 and 2016 and between $100 million and $150 million in payments for non-bank employees who introduce prospective home loan customers to NAB brokers.

If these are interest only loans, then the 5 year interest only period would be starting to expire on the earlier batch of these home loans. A$24bn of home loans, assuming an 60% LVR (as home prices have increased since 2013) would mean property values of potentially A$40bn ...

http://www.afr.com/business/banking-and-finance/financial-services/hayne...

Nobody will be touched by the law I suspect.

You are spot on. Watch this space because the amount of distressed and non-performing loans are incresing dramatically each month. Australia is starting to feel the pain.

Solid name, you are incorrect in several things you have said.
Firstly I have never stopped a first home buyer from buying a home.
We buy mainly at auction and often I have been the only person that has been in a position to go unconditional and don’t have any opposition so hence buy exceedingly well.
We have bought executive homes as you put it. 4 bedroom 3 living and 2 bathrooms on full sections and quality for excellent price. Well under true value and rent does cover the interest component.
Bear in mind that recently our interest cost has dropped by over 20% so landlords are far better off than what they have been.

Please learn to use the reply function properly.