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Finance Minister Grant Robertson tells Bloomberg the Reserve Bank requesting a debt to income ratio tool doesn’t automatically translate to the Government approving it

Finance Minister Grant Robertson tells Bloomberg the Reserve Bank requesting a debt to income ratio tool doesn’t automatically translate to the Government approving it
Grant Robertson

Finance Minister Grant Robertson has told Bloomberg that whilst the Government is obliged to consider the Reserve Bank’s request for a macro-prudential tool that could be used to restrict banks' high debt-to-income (DTI) ratio home lending, "that doesn’t automatically translate to approving it."

The Government is focused on giving first-time buyers access to the housing market, Robertson said in the interview, which Bloomberg interpreted as suggesting he’s unlikely to allow the Reserve Bank to add a DTI tool to its macro-prudential toolkit.

The Government is “obliged” to consider the Reserve Bank’s request for DTIs “but that doesn’t automatically translate to approving it,” Robertson told Bloomberg on Thursday. He noted that the previous time the Reserve Bank sought the tool, concerns were raised by the then National Party led government about affordability issues, especially for first-home buyers and people on low incomes. Robertson told Bloomberg these were factors he will consider too.

The Reserve Bank this month requested the Government "gives consideration to adding restrictions on debt serviceability (that would include DTI limits) to the permitted tools in 2021." The request came in the central bank's response to concerns raised by Robertson about the red hot housing market. The Reserve Bank also rejected a suggestion from Robertson that house prices be added to the central bank's monetary policy remit, suggesting they could instead be added to its financial stability remit.

Robertson expressing concerns about a DTI tool isn't a surprise.  In 2017, as opposition finance spokesman, Robertson issued a press release saying, “Labour does not support debt to income ratios for first home buyers."

See more on a DTI tool here.

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45 Comments

26
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He knows that adding the DTI to the tool kit is the quickest way to a property market crash. House prices are so far out of whack from incomes that sellers would have to decrease their expectations sharply to meet the market.

20
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It is likely a crash is coming anyway, DTI restrictions might just be a way to protect some people from getting into in-serviceable mortgages.

The problem is that implementing them could also arguably have the same effect and leave people in the same boat.

On what are you basing your belief that "it is likely a crash is coming"? I know this is a popular idea but can you reply with some links to what you'd consider the most compelling argument?

11
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Rob to Orr "Mr Orr, what can we do to slow house price growth"
Orr to Rob "We can apply some DTI restrictions to lending"
Rob to Orr "No way! that'll slow house price growth"

28
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No one wants to take action & responsibility for stalling/collapsing a market. It's better to do nothing, let the Ponzi scheme run and play the blame game while it's happening.

This is a set-up by RBNZ, they know full well that Labour won't approve DTI. RBNZ can then lay the blame Labour for not taking action.

20
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Spot on. When this market goes bang it will be huge and this govt does not want to get blamed.

Well said.

Letting the Ponzie scheme run and being too afraid to be blamed for the negative consequences of taking any corrective action, risks an uncontrolled, sudden and catastrophic crash. I would have thought that the intelligent and responsible thing to do, is to take the responsibility that you are appointed and paid to exercise, set out a believable and sensible glide path where the property market and prices can be returned to sane and sensible levels.
Obviously this will completely destroy the property speculator greed and hype about future prices. This was exactly what the ANZ was asking for a couple of days ago. So sure there is is going to be a fall when the speculators realize this. But hey there has been something like a 20% rise over the last year so in the wider perspective that is still reasonable. Get past this immediate hurdle and then we can slowly haul back price to income ratios to their fair long term value of about 3-3.5.

Yes but we probably should have taken action back in about 2013. We're about 7 years late in my view.

So we continue to do nothing and the monster just keeps growing? All ponzie schemes end. When do we want that to happen? Do we want some control over how that happens?

Chris-M a DTI of 3-3.5 would cause a complete crash of housing and our economy. How would that work in New Zealand's cities... good luck anyone buying in Auckland.

At some point it is going to crash any way. When and how do you want that to occur?

22
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Government in action? More like government inaction (again)

10
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Could be confusing it with BMI, which he doesn't look to fond of either.

Maybe Jacinda can rule it out as long as she is Prime Minister.

18
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He doesnt want it because they want to continue with a low income economy with waves of immigrants keeping wages rock bottom.

The DTI would not only keep a lid on house price growth but also encourage wage growth

In Robertson’s response there is no doubt a bit of reason for a pretence of charade - much like Orr’s response to Robertson’s request to address housing affordability.
Both have got to maintain some semblance of independence of each other.
Orr’s proposal of a DTI is consistent with Robertson’s letter request to address housing affordability issues . . . . so Robertson can’t ask and then hinder the RBNZ
Clearly the current rate of housing inflation is unsustainable (even Bindi has publicly said so) and it poses risk of significant correction which is neither in the RBNZ nor the government’s interest. As such RBNZ and government will be in discussions to be looking to take appropriate actions.
One shouldn’t be naive and think that the banks on their own accord introduced self-imposed LVRs without discussion or collusion between RBNZ and each of the four main banks - that all four banks agreed to these is an indication that they each didn’t independently come to taking the same action. There is still considerable risks of a Covid outbreak with economic consequences and RBNZ is not in a position due to creating alarm and uncertainty if LVRs are on and then doing a 180 turn. Housing stability is a common want by both RBNZ and the banks.
Yes there is increasing risk of a correction if the current unsustainable increases continue and for that reason RBNZ, the banks and government will be looking to appropriate actions in their collective interest. For this reason I’m looking to a flattish market - likely for some time - next year.
Anybody looking to buying now for significant capital gains in the short to medium terms is too late. It will be interesting in the next three to four months to note RBNZ mortgage data on investor activity.

A considered response, Printer, as usual.
Looks like best gov and RBNZ can expect and act in concert for, is a reduction in price inflation to around 3-6%. Ie sustainable.
Keep an eye on 10 year rate for USA and NZ however. The US 10 year is rising and inflation is now forecast by a few commentators.
The increase in inflation coming may surprise a few, especially central banks.
It will cut into living standards or spare cash. So, I expect GDP and house price growth to slow considerably after February.

P8... nice post. I think all your points are spot on.

We need DTI's simple as that. Otherwise things will continue to spiral - check out the Hong Kong house sold in 2018 for $426mio. HK's on par with New York as the worlds most expensive real estate but has wages that are roughly a third of NY.

Just to give an idea of how mania like and out of whack the last 6m sales in Auckland are, consider that in the 12m series to November 2014, there were 27,387 sales. In the 12m series to August 2020 there were 27,361, a dead heat. Then look at last 6m series to end of November. In 2014 that produced 14,002 sales and in 2020 it was 17,475, a rise of 24.8%

Over last 20 years, the 12m running series shows 12m sales at an average of 27,384 to end of August each year.
In the 12m to August 2020 it was 23,858.
In August 02 to August 08 the 12m series showed pa sales average of 34,615.
The Aug 08 to Aug 2020 series pa sales averaged 26,481.

This is a short term mania driven by investor leverage, cheap money and need for safe haven investment.
Currently NZ is congratulating itself (see treasury and gov this week) on its great performance vis other countries. NZ has not had its recession yet and seems to consider that it has got away with it.

Rocketing average and median prices for house sales in Auckland and NZ as a whole are seen by some as a metric of booming economy and by others as a mark of rising inequality. Either way, the historical record shows sales well below long term averages.

Lots of folk still suggesting RBNZ and gov worried about a "crash" in prices.
Meaning in fact, loss of equity to those who came to party in last 18 months of rises.
But that loss would only be a problem if they sold or were forced to in next 2-4 years perhaps?
Only other major worry might be increase in interest rates but that is highly improbable in next 2-3 years at least.
I am on record as forecasting median in Auckland to fall by 25% from its March 2017 high of $900k by end of 2021. This is now of course v unlikely. So, I was wrong. Many factors have intervened to prevent any fall in prices, or even to limit increases. We all know them. Prices have not in fact "crashed" in living memory (ie last 20 years). Even in 2007-11 when Auckland sales fell 43%, prices were merely held flat. They only fell March 17 - Nov 19 by about 2% in Auckland. Unless immigration remains at current negligible level and construction is ramped up and land made more available, prices at best will continue to rise above rate of inflation. Only unemployment at 12% would cause substantial drop.

Prices have, and do fall quite a bit relative to GDP. There have been around 6 housing downturns in the last 50 years.

The largest was a fall of 40% after inflation in the 1970s.

They do happen, just not in nominal terms, so nobody notices.

Sometimes they even creep into nominal price falls - in the GFC prices fell by 10% and took about 4 years to climb back to the 2007/8 peak.

https://www.interest.co.nz/charts/real-estate/qv-house-price-index

Labour know that the only way normal people can buy a house is by taking on stupid, irresponsible levels of debt.
It would be unkind to stop them from doing so.

This is why I don't want to wait for these clowns to do anything about the problem. Just got my pre-approval on Tuesday. Not excited at all to be buying, but if interest rates go down again next year, I'd be paying back 750ish a week for a house that I could rent for 700...

Where are you buying CJ?

Auckland, East Coast Bays. Looking for a 2 or 3 beddie for around $1.1 million, but it won't be easy.

Yes it is but it depends on the size of it. Still plenty in the $800's but they are small, try 60-80Sq/m. If you want something new that is stand alone and you can actually call a "House" then $1.1 will not do it.

Yep, looking for something around 70sqm. I grew up in a 70sqm apartment with my parents and my brother, so don't feel the need to get anything bigger than that with just one baby on the way. What I care about is being close to the beach as that's my #1 stress relief after a long work day. Too bad that's also one of the most expensive factors.

CJ
Genuinely wishing you well.
As you will know, homeownership is long term with considerable intrinsic value and short term fluctuations in the market are irrelevant as long as one can service the mortgage and are prudent to minimise risks.
East Coast Bays sounds great.
While I aren’t recently familiar with East Coast Bays, about 10 years ago I spent a bit of time at Gulf Harbour mucking around sorting out a yacht and Whangapora and the Bays looked reasonably priced given the coastal lifestyle and great accessibility to tremendous sailing grounds.

We already have DTI, banks use DTI on you ever time you get a mortgage

Only if you can't come up with enough deposit. If you can provide over 20% then they really don't care about your income, the house etc. If you're under 20, they'll go through every little thing line by line to find a reason not to lend to you.

Doing the right thing is often doing the hard or unpopular thing. It's either an asset reset (bad for the speculator) or hyper inflation (bad for everyone).

Will Larbour sell out to protect international bank shareholders...?

"Doing the right thing is often doing the hard or unpopular thing" - the big dilemma of democracies. The dilemma could be resolved by properly educating the masses, but most people are not interested in the intricate details.
The other solution could be stepping up as an actual leader to steer the public opinion, raising support behind the right cause. If masses can be convinced that going to war is good for them, then it shouldn't be too difficult to convince them that it's ok to not have the virtual value of their family home constantly go up.

Imagine being unenthusiastic about a metric which prevents people from borrowing too much. I wonder what he will go for. I bet it pushes more money into housing.

They're unenthusiastic about it because they trapped themselves. On one hand they want the median kiwi couple to be able to buy a house - which is only possible at the current prices if said couple borrows at DTI 5+. On the other hand, they don't want prices to fall (to please mom & pop "investors"). Introducing a DTI limit of 5 would result in lower prices overall after 6-12 months, but then boomers would lose their sh** and Labour could say goodbye to their new voter base.

DTI of 5+? I think you've talking about couples, not individuals. Plenty of single people who would like to own a home as well but for them it's going to be more like 10+. Needs to be a system that allows everyone to be in the game.

10
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The best time to put in DTI ratios is 10 years ago, and it will always be 10 years ago.

At some point someone has to bite the bullet and do it, and in 10 years time we'll thank them.

Looks like an Ace card played by Orr. He gets to blame the government if he cannot bring in tools to control house prices. I'm not sure what we are paying these people for to be honest. If all you can do is raise or lower the OCR to try and control things, anyone can do that.

Remember Carlos67, if not mistaken 2013 the RBNZ govt. has asked similar tool, being rejected by Nat govt. - which raises question as to why Lab is 'unenthusiastic about it' - Remember across the ditch, a simple TD guarantee is there, CGT is there, some sort of DTI in most OECD countries are also there. You can't blame RBNZ, when is no longer OCR being mandated to them, the unemployment is being injected by Lab in 2018, and recent public letter by Grant is try to shift the onus of housing from govt to RBNZ, cheeky eh? - if you in the RBNZ shoes, you'll reply the same.. it's govt job to sort out their taxation/aka CullenCGT, grant RBNZ DTI tool and any other prudent measures.. and any Red/Blue govt said the same things.. Nope. So let's see if RBNZ can do the heavy lift alone now.. if you can't do a control descent, then let's just F*** it.. bring it up quickly to stall point.

DTI could end up being a pretty blunt tool and is not independent of interest rates. Could a better option to be pushing responsible lending standards harder? Banks should be able to assess what the appropriate DTI is based on individual circumstances

Count how many months since removal of LVR by Mr.Orr, to this immediate LVR 40% self imposed for 'investor' by ANZ, after the Bank check their book that the investor loan numbers eclipsing the FHB number. My point is, you can't expect the Tobacco or Alcohol company to be self regulated/prudency immediately, this is the grey area/period where damage can be done permanently, while profit still need to be extracted by them. Look plenty of countries do implement DTI, the tool is there being used on/off worldwide, rejecting the idea means just that.. no willingness, even remotely possible for consideration/discussion. May be NZ should have referendum? for everything.

RBNZ and Government will have to work together. But it seems that the Trading Banks will take the initiative to impose restrictions to protect their books. Leaving the authorities as spectators.

So does RBNZ response to his letter, create your Housing Agency, you give us not much tools and now even added unemployment mandate to us. Now, watch what we can do to 'stabilise the economy'. RBNZ can be likened to Surgeon operating patient, can can only resulted is patchy result when the full patient condition is not being disclosed. CPI report & real inflation already been disconnected, so does the OCR handling of it. Watch out when things started to move seems in assurances BUT all along in very disconnected mechanism internally.