The RBNZ was late to the debt-to-income limit party which is why this tool won't be added to its macro-prudential toolkit anytime soon, Gareth Vaughan argues

The RBNZ was late to the debt-to-income limit party which is why this tool won't be added to its macro-prudential toolkit anytime soon, Gareth Vaughan argues

By Gareth Vaughan

Finance Minister Steven Joyce's Wednesday announcement that he's effectively kicking the Reserve Bank's plans for a debt-to-income (DTI) limiting home loan tool into touch until after September's election came as no surprise given the Government's public lack of enthusiasm for the concept.

Housing is set to be a key issue in the September 23 election. Thus the Government's move, requesting a cost-benefit analysis and public consultation before any decision is made on potentially adding a DTI tool to the Reserve Bank's macro-prudential policy toolbox, is clearly politically motivated. The potential for forlorn young couples on the 6pm TV news remonstrating with reporters about how they could be locked out of the housing market by a DTI tool must have been obvious to senior ministers and government spin doctors for some time.

But rather than blame the Government, the Reserve Bank's top brass should be looking in the mirror. Because they missed the chance to get a DTI tool in their macro-prudential toolbox from day one. A tool with the potential to be a game changer in the NZ housing market.

Back in 2013 when the Reserve Bank's macro-prudential toolkit was put together, via a Memorandum of Understanding (MoU) between Reserve Bank Governor Graeme Wheeler and then-Finance Minister Bill English, a DTI tool was left out. Although four tools were included, most notably the one being used that restricts high loan-to-value ratio residential mortgage lending, the Reserve Bank did not appear interested in a DTI tool.

Then, as house price growth took off anew last year, rather than turn to one of the three remaining tools in their kit, the Reserve Bank bosses decided that, after all, they'd really quite like a DTI tool instead.

Given a government that was never especially keen on the high LVR limits being implemented and a election likely to have housing as a key issue was looming, it was always going to be a challenge for the Reserve Bank to get a DTI tool rubber-stamped. And so it has proven.

'Not in scope'

In the 2013 MoU the best the Reserve Bank could muster in terms of DTI limits was a vague mention of a potential debt servicing tool at some unspecified time in the future. 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."

In a September 2014 submission to the Ministry of Business, Innovation & Employment on the Responsible Lending Code, the Reserve Bank talked down the concept of debt-to-income restrictions. A strict debt-to-income limit wasn't an efficient way for the Code to make sure lending was being done responsibly, the Reserve Bank argued, adding: "If the desire is to make the affordability test more explicit, then more explicit interest rate buffers would probably be a more efficient option for the Code." 

Clearly implementing a DTI tool doesn't come without its challenges. Bernard Hodgetts, the Reserve Bank's head of macro-financial stability, told me in a May 2015 interview the prudential regulator had been asking banks for "information on the debt to income characteristics of their mortgage lending." They were discovering there were challenges with making apples-for-apples comparisons across banks because, for example, banks were calculating the income going into their debt-to-income measures differently.

Hodgetts noted that a chart in the May 2015 Financial Stability Report estimated an Auckland debt-to-income ratio somewhere between 7% and 8% versus just 3% to 4% elsewhere in the country. "So they [debt-to-income ratios] certainly appear to be elevated in Auckland," he added. But Hodgetts said: "At this point we certainly have no plans for any debt-to-income type measures or anything of the sort."

'We like the Bank of England’s proposed restrictions on high DTI mortgages better than NZ’s LVR restrictions'

Hodgetts was speaking at a time when DTI macro-prudential tools were certainly in focus in an international central banking context. In 2014 the Bank of England introduced one and in 2015 the Central Bank of Ireland introduced one. On July 1, 2014 the New Zealand Institute of Economic Research issued a paper expressing a preference for the Bank of England's DTI tool over the Reserve Bank's LVR restrictions. The latter strengthens banks' mortgage portfolios, while the former addresses risks around whether borrowers can afford their repayments.

Here's a taste of what NZIER said:

“We like the Bank of England’s proposed restrictions on high LTI [DTI] mortgages better than New Zealand’s LVR restrictions.” said Dr Kirdan Lees, Principal Economist at NZIER.

The Bank of England's approach to financial stability directly targets the risk of whether people can afford to pay back their mortgage, which the LVR restrictions only do indirectly, added Lees.

“Restrictions on high loan to income mortgages directly address the risk that the Bank of England is worried about: that very high household debt could cause a sharp economic correction in the future. High LVR mortgages only tell you that house purchases are made without much collateral. But LVR restrictions do not take into account households’ long-term ability to service debt," said Lees.

He said the Bank of England has a policy solution for a well-defined problem being stopping soaring household debt that sits at the heart of financial stability risks.

Too late to the party

The Reserve Bank appeared to crank up its enthusiasm for a DTI tool in late 2015 and early 2016 as house prices in Auckland, and then elsewhere in the country, surged. New heights for New Zealand's debt-to-disposable-income ratio, hitting 165% and subsequently 167%, added fuel to the fire. But by the end of 2016, as the Auckland housing market showed signs of cooling, Wheeler was acknowledging the Reserve Bank wouldn't be using a DTI tool even if it had one.

That was after vested interests in the real estate industry came out strongly in opposition to a DTI tool. Bank bosses also expressed opposition, notably airing concerns about first home buyers being locked out of the housing market. BNZ CEO Anthony Healy did this. As did David McLean, his counterpart at Westpac. Incidentally Joyce's statement noted he's "particularly interested in what the impacts could be on first home buyers."

Westpac's McLean, meanwhile, had this to say when I asked him in November about the Bank of England's 4.5 times, and the Central Bank of Ireland's 3.5 times debt-to-income ratios:

You look at Auckland, the average house price now in Auckland is over $1 million and the average income's only just recently hit $100,000. So neither of those [British or Irish] numbers would work particularly well in Auckland. So I don't want to second guess how they [the Reserve Bank] do it.

But do they want to make the whole thing take a haircut straight away or do they want to just start at a level which stops it growing any further? My personal view with the housing market is people worry about the housing market going up and affordability is an issue. But it's worth remembering the opposite situation, which if house prices were tanking is actually far worse for the economy because it's destroying people's wealth and putting pressures on all sorts of parts of the economy.

So in some ways a rapidly rising housing market is what I'd call a fairly high quality problem because it's a sign that the economy's going well, people want to come here. So I think the best thing for the New Zealand housing market would be if the growth tailed off and it didn't increase for a long time, and economic growth was happening which would gradually improve affordability. I don't think the right answer is a big crash in house prices.

Note the British DTI applies to no more than 15% of the total number of new mortgage loans. And for Irish banks the DTI limit should not be exceeded by more than 20% of the euro value of all housing loans for primary dwelling (owner-occupier) homes during an annual period.

On the backburner

So a DTI tool is on the backburner. But it could have all been different if the Reserve Bank had pushed for its inclusion in its macro-prudential toolkit four years ago. Would the Government have kicked up a fuss in 2013 about including it as one of four or five tools the Reserve Bank might, potentially use one day? Probably not. But trying to add it to a toolbox with four other tools four years after the toolbox was established, during an election year, was always likely to prove a step too far.

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It took quite a long time in Singapore for the LVR's to take effect. The good news is that finally they appear to be working here. The one thing I still disagree with here are the interest only mortgages that are still issued.

Alternative measure in China to kerb property investors

The Chinese government can dial up as much pain as it likes without affecting single home owners.

That's better than any measure suggested here. The difference in payment between 30 and 25 years isn't that much that it should hurt, and it's responsible. The nonsense that it would shut down is risky interest only loans.

The nonsense that it would shut down is risky interest only loans.

Never going to happen here, unless the regulator changes, or is forced to change, it's ideological stance.

We substituted middle class jobs for eurodollar-driven credit; now that there aren’t as many eurodollars, the economy obtains neither credit nor jobs. Read more One could replace eurodollar with NZD bank credit collateralised by overvalued residential properties and not much else.


Wheeler said monetary policy would "remain accommodative for a considerable period".

I suppose he believes this will stop the wheels falling off a banking system that expects fabricated credit to self generate it's own funding and remain stable.

The fatal flaw that was considered in 2007 (rather than LTCM 1997) but proven beyond doubt in 2011 was that so long as whatever bank liability any eurodollar bank might create was considered currency, further balance sheet expansion would thus create all the “dollars” necessary to fund it. Thus, that fatal flaw was its circular reasoning, that balance sheet expansion created “dollars” which funded balance sheet expansion, creating more “dollars” and so on. Remove the expansion and the inconsistencies, risk primarily, implode the whole intent. Like a spinning top, it can only ever be stable at high rates of growth, because when it slows everyone starts to question whether that math-as-money is actually real or merely, like alchemy or the Nigerian scam, an impossible dream. Read more

Dictator, not too sure why you think that "interest only" loans are risky?
Providing the borrowers asset position is Ok and servicing is fine then for investors the interest only loan is the way to go.
Where do you see the problem?

The fact that it relies on the asset position is what makes it, by definition, more risky.

Especially if the 'value' of the asset has exponentially increased and is in an asset class that is prone globally to very extreme movements.

One could argue that the servicing isnt OK if they can't afford to pay principal

They're risky because they are wholly tied to asset appreciation and not revenue or dividends. Would you borrow upwards of $200,000 from a bank to buy shares or gold hoping the value increases?

Also, I think you mean "for speculators the interest only loan is the way to go." One would hope a property investor doesn't have an interest only loan on a property while renting it out.

No I wouldn't borrow to purchase sshares or gold and Banks wouldn't be keen to lend for that purpose either.
Interest only loans on rentals makes perfect sense if positively geared and enables better leverage.

How do you repay the principal then?

When you sell the property or when you decide you want to!
Interest only loans are beneficial for both investors and other buyers as it enables them get established and provides better leveraging.
Personally never known anyone who has not benefitted from interest only over the past few years.
If interest rates were much higher then I would be paying off loans if my returns were negative but as they aren't and won't be ever in my opinion then why bother?

If you wouldn't borrow to invest in shares but borrow very large amounts for housing then you poor understanding of risk. You can borrow and buy shares that return more money in dividends than the leveraged return on housing. You'll also find that our stock market is far more liquid than the housing market which would allow someone to exit from a bad position quickly, in fact the Auckland housing market appears to have a liquidity problem. Have you considered how vulnerable an interest only loan is to interest rate increases?

I had a loan appear in the past day on a platform I won't name. The reason for the loan was because borrower did not have enough money to finish their house to sell in Auckland. Part of the note stated that the work to date had been financed on credit card. How many people in Auckland are at their borrowing limit and still need to finish work so they can sell? Does the above behaviour explain the number of incomplete buildings with no CCC that are appearing on trademe?

Are you saying the reality tv program 'The Block' isn't so much reality? Where contestants would just keep on gambling with the cost of their rebuild in the hope the auction price would cover the lot plus some profit.

Different strokes for different folks as they say.
Won't touch shares ever again personally, and you shouldn't tar all investors with the same brush!
The reality is that the investment housing market doesn't start and finish in Auckland and there are oodles of very successful and wealthy property investors away from Auckland.
Banks won't lend money for shares as far as I know unless the lending is supported by landed security!
Does that not say something about Banks opinion on the safeness of housing and the sharemarket?
Shares are a gamble where as property investors if they are financial are no worry to Banks.

If houses were so safe why do banks require people to have a deposit? Surely they would provide 100% finance. I think you over state the "safeness" of housing......

Why do banks not own all Houses....Well they do until your Tenants or your serf like selves pay down all the debt.
This all depends on the economy working.. (Something unheard of by Landlords).

Or supported by government debt via Taxpayer rorts and torts. ...and even more "Borrowings" your name.

Debt is the issue. Economy isn't. It can be fudged around...until it cannot....any longer.?? ..

Some people think they are rich...ask a Trump...but if all the debt is called in...the house of cards will just tumble and fall.

Leveraged to the hilt works well on the way up..often you can Bank on it.

All make is like a tap....some drips would like a flood of it....others a cool calm the Reserve Bank....of nuffin...but overpaid Berkes...fiddling and fart(H)ing...around.

Plus a little Interest...naturally...compounding the problem.

Bad Robot, some Banks were lending 100 per cent at one stage.
Banks are lending us 100 per cent at the moment as when we purchase a property we are not stumping up with any money whatsoever!

So a FHB with no equity is able to get a 100% loan. I suspect not. I suspect what you are saying is that you have a 100% loan on a house you are buying but have other properties with equity that the bank have a mortgage over - what you are doing is diluting your equity - your "deposit" is the equity in your other houses. .

THE MAN 2 - its interesting that you say you won't touch shares. A lot of kiwis won't because they were burnt in '87. But the interesting thing is that Kiwis attitudes towards housing over the last 5-10 years (exceptionally bullish) are the same attitudes that they had to shares in '87.

Best to put all your eggs in one basket right? Shares in '87, property in 2017...No lessons to be learned here.

The most noticable thing in 1987 was the number of people who had borrowed heavily against their house to invest in shares. The borrowing was so high as to be unsustainable debt for a number of people and they lost their houses after the crash. Right now there are a number of people financing housing and work on houses with very high interest rate debt. There will be a few people that go broke or lose their equity this year as they will have overextended themselves.

There is this theory being run by real estate agents and property investors that shares are inherently risky , because they can go down ... and frequently do so ...

... whereas houses .. house prices only ever go up ... or occasionally sideways ...but mostly up .... well , not in all countries of course , but in NZ it only ever goes up ... and up ... oh yes ... it is true ... aha ...

My shares with dividends ,capital repayments as a result of share buybacks and annual capital gain have returned a minimum of 15 per cent over the last ten years The Boy. Easily beats your measely returns in Christchurch where rents are reducing, annual costs including interest are increasing and capital gains struggle to beat inflation. Unlike you I have no tenants to contend with and empty rentals waiting for tenants. No costs at all and a ready market every day of the week to sell some shares for whatever reason. Luckily I did not listen to all those negative people like you who keep harking back to the 87 crash. I bought my first shares in the 1985. I made mistakes over the years but overall I have done well and retired when I was 58. If there is one negative aspect about shares it is that good companies are generally takeover targets. Then you have to reinvest the proceeds if the takeover is successful. It is never boring.

Fair enough Gordon.
No point disagreeing with you as it will get tedious.
Glad you retired at 58!
I am younger than that and haven't got a 9 to 5 job either!

You cannot disagree The Boy. You say you have rentals in Christchurch, possibly the worst performing city in New Zealand return wise. You should have stuck to shares but to do that you need some ability and a decent income of course.


Haven't you realised yet that it is a complete waste of time arguing with The Man on the merits of the stockmarket. He doesn't understand the market and has no intention of (ability to?) trying to do so. he represents a classic case of confirmation bias.

Cobblers regarding borrowing on shares without security other than the shares.
You must have landed security with the Bank!

No - you can trade on the margin

The funny thing about margin is that most of the percentages allowed are between 60-70%. They won't let you leverage as much as with housing.

As I am aware Banks won't lend to you to buy shares with the shares being security solely.
They may have changed policy but I wouldn't lend money to anyone to buy shares but I would to purchase property providing I thought the property was bought ok!

Actually I had a talk to my bank about that. They were more interested in the loan being large enough to justify setting it up. Like anything you can strike up a deal.

No you can't. Doubt any trading bank will lend against shares solely.

you are so wrong, it is very common now to margin borrow and invest,
its no different to using leverage to invest in houses apart from you need skill and knowledge to be competent at it

Please, just for once, check your facts before posting.

You opinion is based on nothing at all. Versus the fact that I've gone and talked to my bank about what loan structures they could provide. You should do research before shooting your mouth off.

Can you please stop with the facepalm inducing comments? My head hurts.


The genie was let out of the bottle a long time ago

Once upon a time there was separation between banks and mortgage lending. Most of the housing finance in NZ was provided by Life Insurance Companies and Building Societies (and solicitors - interest only) and they only ever lent out money they had. They weren't banks.

Life Insurance Companies and Building Societies applied DTI's as common place, standard practice.
Importantly they weren't banks with credit creation capabilities

Then the banks took over the Insurance companies and took control of housing finance
Governments made the fatal mistake of letting them inside that tent.
Governments carry the responsibility for that decision

Then the building societies became banks or got taken over

Problem for governments is they can't unscramble that omelette.
The mistake has been made

They cannot get that genie back in the bottle
They could, but that would mean forcing banks to divest their Insurance arms
Luck with that
Bank tellers now spend most of their time selling insurance

Yes, the unwillingness of government to allow the central bank to use DTI's is purely POLITICAL

"My personal view with the housing market is people worry about the housing market going up and affordability is an issue. But it's worth remembering the opposite situation, which if house prices were tanking is actually far worse for the economy because it's destroying people's wealth and putting pressures on all sorts of parts of the economy."

It's a bit sad when a large enough decrease in house prices to make them affordable to the entire next generation can ruin the economy of a country. Economics 101: Diversify your investments. It's also worth noting it's "wealth" on paper, and has no value until it's sold. Sure, you can lever off it, but you can't buy milk or bread or pay the rates or go on holiday using a house.


The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(1 July 2009) is misconceived stating:

“Cash “

Consistent with common usage, cash includes not only legal tender bills and coins on hand but demand deposits at banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits permitting the entity to deposit and withdraw funds at any time without prior notice or penalty.

“All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank's granting of a loan by crediting the proceeds to a customer's demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. [ASC 305-10-20] ” [Emphasis added.]

and should urgently be redrafted.

Such internally created units of account are not transferable among banks because they are unique to the MFI that created the units of account in their books of account, and can only be offset in what MFIs call their “payment clearing,” which means: incoming units of account are offset against outgoing units of account and the balance, if adverse, MUST be settled in legal tender meaning central bank money, so called federal funds in the United States. Other countries have their own mechanisms, but they are all based on non-legal-tender offsets of accounting units against each other — incoming vs. outgoing. If nothing comes in, as in stress situations, nothing can go out, markets freeze and financial assets cannot be liquidated... Contagion sets in. Déja vue... Read more

This all suggests that most western economies are based on speculative trading rather than actual productive activities. Given that economists are obsessed with models that exclude boom and bust you would think that we would want to steer away from money creation via debt, or to limit the money created from debt so as to not threaten financial and economic stability.

Perhaps it is time to treat housing as a human right and not a tool for privatised money creation.

But did that wealth ever exist to begin with?. I feel it is a bit like playing hot potato. It is a great game while the music is going, with the real estate agents and media keeping the music going for self interest. But eventually the music stops, and someone end up stuck with the hot potato in their hands, eventually burning them badly.

Sorry but you are wrong Wildcard.
Many, far too many people use their homes as an ATM to buy all sorts of things of no tangible value. It's one thing to leverage one property to buy another income producing asset.
That can be productive and profitable providing the due diligence and advice is sound.
It's a slippery slope and utterly stupid though, to borrow for milk, bread travel, and feel good items.

Let us not forget that a lot of this has been fueled by greed. But that is human nature. But the part can't last forever, and there will be a hangover somewhere. At the moment the system is setup so savers take the bath. eg a bank fails with have the OBR. So the borrows aren't really taking much of a risk, when really it is the borrowers who have pumped up the prices,and caused the mess.

The next funding for State Benefit Hospitality Housing..for the elderly....Silly savers. as per UK.

All of the discussion on lending against shares ignores the use of CFDs or Spread Betting (UK mainly)