The Reserve Bank says it will push ahead with developing a framework to limit the ratio of debt home buyers can borrow in comparison to their incomes, but won't be setting the interest rate banks use to test borrowers' ability to cope with rising interest rates at this stage.
The Reserve Bank has published its response to feedback received on its proposed policy for debt serviceability restrictions (DSRs) on residential mortgage lending, which was issued in November. Consultation closed on February 28. (See our coverage of what the Reserve Bank said in November here and here).
It sought feedback on the merits and potential design of two types of DSRs:
- Restrictions on debt-to-income (DTI) ratios – which impose a cap on debt as a multiple of income; and
- A floor on the test interest rates used by banks in their serviceability assessments which test the ability of borrowers to continue repaying their loans if interest rates rise to a certain level.
“Our modelling indicates that first-home buyers would be the least impacted by a DTI restriction, with investors impacted the most as they tend to borrow at higher DTIs than other groups on average," Reserve Bank Deputy Governor and General Manager of Financial Stability Christian Hawkesby says.
"This aligns with our Memorandum of Understanding with the Minister of Finance on macroprudential policy which states that in designing DSRs, we will have regard to avoiding negative impacts, as much as possible, on first-home buyers. Additionally, the use of speed limits and exemptions can further mitigate any negative long term impacts on first-home buyers."
"We believe that DTI limits are an important additional tool for reducing financial stability risks and supporting house price sustainability, and would fill a gap that is not covered by existing regulations. We plan to have the framework finalised by late 2022, so that restrictions could be introduced by mid-2023 if required," says Hawkesby.
This pushes back the timeframe outlined in November when the Reserve Bank said banks needed to prepare their systems for the potential introduction of a regulated DTI limit no later than the end of 2022, saying a DTI restriction could be implemented by the fourth quarter of 2022, and a test rate floor could be implemented in the second quarter of 2022.
Hawkesby notes banks’ test interest rates have now started rising in line with market rates, and the Reserve Bank expects to see a slowdown in high-DTI lending over coming months.
"The new Credit Contracts and Consumer Finance Act regulations, changes to the tax treatment of investment property, and tighter loan-to-value ratio [LVR] restrictions on owner-occupiers are also having an impact on the availability of mortgage credit. We therefore do not see an urgent need to impose an interim test rate floor at this stage, but we are monitoring the situation closely and do not rule out this option if there is a resurgence of risky lending in the housing market," Hawkesby says. "We will undertake further work on the preferred methodology for this tool, in case it is required in future."
As reported by interest.co.nz over the weekend, ANZ says people applying for mortgages currently need to be able to satisfy it that they would be able to service debt at an interest rate of 6.7%. And ASB says it’s testing applicants using a rate of 6.85%. The two banks’ standard one-year to five-year fixed mortgage rates range from 4.49% to 6.45%.
In November's consultation paper the Reserve Bank assessed the impacts of introducing a DTI cap for borrowers of six or seven times gross income, and a test interest rate floor for bank lenders of 7% or 8%. However the Reserve Bank stressed these were illustrative models and might not necessarily be where it would set such restrictions.
The latest quarterly Reserve Bank DTI data, for the December quarter, showed a levelling off of DTI ratios following very sharp increases over the past couple of years as the housing market went into overdrive.
The table below comes from the Reserve Bank.
The Reserve Bank says it uses macroprudential tools, such as LVR restrictions, to reduce the financial stability risks associated with boom-bust cycles in the economy. This, it says, helps meet its statutory purpose of promoting the maintenance of a sound and efficient financial system.
The Reserve Bank's attempts to add a DTI tool to its macro-prudential toolkit date back to at least 2016, but were previously stymied due to politicians' concerns about the tool's potential impact on first home buyers. The central bank previously consulted on the potential introduction of a DTI tool in 2017.
84 Comments
DTIs should only apply to new purchasers. Otherwise, homeowners who can afford the loan would be forced to sell because a ratio arbitrary to them is too high and no bank wants to refix with them.
I suspect there will be another set of ratios by borrower type. DTIs will hit FHBs the hardest, so Labour will want to shelter this cohort from such changes.
I'd be happy with an exemption for mortgage renewal on a house that the borrow lives in - investors always have the option to sell to bring their portfolio in line.
As mentioned above and by me elsewhere in these comments, FHBs are not affected nearly as much as investors by a simple DTI test.
My understanding is that existing mortgages would not be affected by the new DTI limits - it would result in the need for widespread restructuring of loans and/or early repayments and political fallout.
That said, banks have a tendency to become over zealous when new rules come in and could force some borrowers to restructure even if not technically required.
There is a middle ground that barely affects FHBs and knocks out the worst excesses of investors. Set a DTI at 7 (which I appreciate is very high internationally and should be brought down over time), and you impact ~10% of FHB lending and take out ~35% of investor lending.
https://www.rbnz.govt.nz/statistics/c40-residential-mortgage-lending-by…
I remain cautiously optimistic, even in the face of past disappointments.
The important thing to note from the data I linked to is that introducing a DTI is much more effective against investors than FHBs, and we should be extremely wary of vested interests crying crocodile tears on behalf of FHBs when they are introduced. FHBs have their wings trimmed a little while investors are kneecapped.
Yes mid 23 should have been mid 2020 !! In any case unavoidable interest rate hikes especially for NZ and US will stop the first tier A rated banks lending on overpriced housing speculation, especially in the highest price to income country in the world, you guessed it, NZ.
Yeah, but what IO is saying is that it will amplify the fall, because essentially you are restricting lending now in multiple ways. It's like the RBNZ is in bizzaro world where it does all it's actions backwards, doesn't implement things when they should, then implements them when they shouldn't.
But they have been trying - since 2016 and the government wasn’t keen at the time and hasn’t really been until they indicated differently last year! But it was far too late by then, there are countless people in way over their heads by now. It is just so unbelievably frustrating to watch this all unfold as everyone warned it would. I am left leaning politically so tend to give Labour the benefit of the doubt on most things, but I will never forgive them on this.
The Reserve Bank's attempts to add a DTI tool to its macro-prudential toolkit date back to at least 2016, but were previously stymied due to politicians' concerns about the tool's potential impact on first home buyers.
Agree 100% with the comments above.
Emergency OCR levels should have been accompanied by the likes of a DTI to avoid the current property bubble. I'm surprised that the RBNZ are happy to make announcements like this that draws attention to their incompetence and tardiness.
Current NZD to UDS: $0.656
Official NZ Inflation: 6.9% [just say 7%]
NZD's Purchasing Power Adjusted for Comparative Inflation:
0.07 * 0.656 = 0.04592
0.656 - 0.04592 = 0.61008
Though crude [TWI Free], at BEST today's NZD-to-USD currently buys what USD $0.61 brought a year ago.
Forget housing, find a store of value! The RBNZ is still NOT taking inflation seriously! The OCR at 1.5% proves they don't understand the gravity of the situation.
My thoughts would be to dollar-cost-average into:
- Bitcoin
- Silver
- Rare Earth Metals ETF
- Uranium
- Perhaps Copper (though it's already had a great run)
'Shorting Plays' are also a strategy, though one that's seen many go broke. Diversifying forex holdings would probably provide some form of hedge.
This does seem to create a FOMO in the short-term provided the DTI is not too high (which would make it useless). In the medium to long-term, 3 years + this could bring about greater stability in the market that may manage risk and mitigate extreme house price increases as buyers (first home or investors) are constrained with the amount of lending/funding they can access. Unsure of the details related to how investors' cashflow/income (if not on a normal 9-5 wage/salary) is accounted for as part of DTI and how this affects homeowners/investors that have significant equity.
The glimmer of FOMO would surely be turned around when they get out the calculator and plug in the interest rate though right? ‘Ooh better borrow 9x my income today, oh nah wait can’t. Can’t even do 6x right now, dam veggies, petrol, interest rates, council rates etc’
You can certainly work out those who have been investing for 30 odd years in many diversified investments and those who think they know with no personal experience at all and probably nothing to show for it as a result. Typical intelligence of those who dont vs those who do
I get your attempted point JustAnOpinion but the brightline rules are a completely separate debate. What about properties not affected by brightline rules. Taxing interest as though it is income is fundamentally flawed and goes against all the common sense rules of accountancy. By all means address any perceived issues with good legislation but at least come up with something that stands up to scrutiny.
"Interest is treated as income not an expense"
Are you getting confused because deductability is being phased out for investors?
Might want to refresh the concepts and laws found in the Income Tax Act 2007
Income Tax Act 2007 No 97 (as at 16 March 2022), Public Act Contents – New Zealand Legislation
Why would it? The investor is now worse off as they are paying more tax on the same rental income, why would that justify more borrowing potential?
Seriously though, I have heard from other commenters here that rental income will be discounted with some formula to account for the associated expenses of the rental property for DTI calculations, I don't remember the precise details.
It would be perverse if rental income were taken at face value for a DTI, without any discounting for the insurance, rates, maintenance and likely interest costs associated with the income. Treating this appropriately is a nice clean lever to affect investors without bothering FHBs, which the Government has made clear should be spared the worse of any regulation.
Ahh yes I'm with you now.
Either way, with 40% LVR and a DTI of ~6, the rental yield would need to be around 10% to be able to purchase. If that income is _after_ interest, insurance, rates and general maintenance then the impact on small scale investors would be incredible. Goodbye yellow brick road.
Another waste of time. You cannot implement changes in a years time to correct problems that exist here and now. With the timing of this and an election next year, everyone will have forgotten about it by then anyway. I can see why some people on here get as mad as hell, its just jawboning and then you wait forever for it to happen then its crickets on that as they talk about the "Next big thing".
They should have a variable DTI for new loans and additions to loans. The formula could be:
(10 - the interest rate) / 3 + 4
That way the DTI would range from between 7 and 4 assuming interest rates are between 1 and 10%. If you want to slow the movement of it you could restrict it to moving by 0.1, 0.2 or 0.5 per annum towards the target level.
60% of mortgages are refinancing in the next 12 months - with double the cost of debt at minimum
8% are going broke
35% will probably be under considerable financial pressure and need substantially increased income
69% have ignored the old golden rule (that no more than 30% of gross income should be used for debt servicing) so discretionary spending will be hammered unless they somehow manage to increase their income or reduce their debt
Good summary DDDD, I remember refinancing my loan last March, DTI criteria used by the bank was debt = loan balance (plus any over draft available) + bank accounts including overdraft facility @max + credit cards @ max limit. Income was income + overseas income @70% + rental income@70%. DTI max was 5.5
Plenty of errors there DDD. 60% were for the whole year, we are almost in May already. Many people would have looked at the option to break and refix, the writing was put on the Wall by the RBNZ months ago you had to be living under a rock if you didn't think rates were going to rise. There is no 30% golden rule to that effect, had I done that I would still be renting and broke like so many on here. I maxed out on debt and repaid it as fast as possible.
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