New mortgage borrowers are stretching themselves much less thinly than they were, according to the latest debt to income ratio figures produced by the Reserve Bank.
The latest figures are probably not surprising, given the way mortgage interest rates have risen sharply and the fact the housing market has turned.
Notwithstanding that though, the latest data will undoubtedly come as some relief to the RBNZ, which has been watching the debt to income ratios race higher and higher over the past few years.
People have been taking on more and debt relative to what they earn as house prices have raced higher. The super low interest rates that we saw up to a year ago helped to make that possible - since the interest servicing costs were actually coming down even as the levels of debt being taken on reached eye-watering levels.
Now, with mortgage rates substantially higher, the tide has turned in a big way.
The figures for June 2022 show that the debt-to-income ratios for new borrowers have dropped very sharply over the last quarter to now be at their lowest levels in around two years.
The RBNZ had sought for some years to get a debt servicing restriction, probably a debt-to-income measure, included in its 'macro-prudential toolkit' - which already included such things as the loan to value ratio (LVR) restrictions. Having finally received government approval the bank is working toward having a debt servicing framework ready by the end of this year so that restrictions could possibly be brought in next year if needed.
Having earlier moved with some urgency on the issue, the RBNZ now doesn't appear to be as urgent - and the latest DTI figures would tend to indicate why.
The RBNZ keeps a close eye on borrowing that's done on DTIs of over five - in other words where the amount borrowed is over five times the annual income of those taking out the mortgage.
The most heavily geared borrowers are typically the first home buyers. And the debt to income data has shown that in recent times well over half the monthly amounts borrowed by FHBs have been done on DTIs of five or above.
The June figures show, however, that for the first time since late 2020 under half the amount borrowed nationally by FHBs in that month was done so at a DTI of five or more. And it has been a sharp fall, with the percentage of +5 DTI borrowing for FHBs having dropped from 53.9% in March to 46.9% in June. In June 2021 the percentage was at 57.5%. That percentage actually got a bit higher than that, reaching 58.3% in both September and December last year, before starting to drop this year.
The Auckland FHB figures are, commensurate with the expensiveness of Auckland houses, still markedly higher than the rest of the country, but also now dropping sharply. In June 2022 the percentage of over five DTI borrowing was 60.3%, down from 67.7% in March and 71.3% in June 2021.
I suppose the big question might be how much more the RBNZ would like to see these figures falling by. But presumably the central bank will be satisfied at seeing the general downward direction.
The debt-to-income data has been gathered and produced by the RBNZ since 2017. It is monthly, but released quarterly. Generally speaking the data between 2017-19 showed a falling trend, from quite high levels, before beginning to rocket. And now the figures are coming down again.
As we've done since the start of this data series we are comparing the latest month's figures (June 2022) with the last month from the previous release (March 2022) and we are also comparing both these with June 2021.
DTIs of above five are regarded as getting up there, so we highlight the percentages of total mortgage money that is borrowed by both first home buyers and other owner occupiers at DTI ratios of five and above. Our calculations in both tables here exclude the (small) amount where the DTI size is unknown.
The table below shows the percentage of new mortgage money for first home buyers and other owner-occupiers that is on debt-to-income ratios of over five times:
| Group | Jun 22 | Mar 22 | Jun 21 |
|---|---|---|---|
| FHBs nationwide | 46.9% | 53.9% | 57.5% |
| Auck FHBs | 60.3% | 67.7% | 71.3% |
| Non-Auck FHBs | 34.5% | 41.9% | 45.7% |
| Other owner/occ nationwide | 38.3% | 44.1% | 44.9% |
| Auck other owner/occ | 49.6% | 57.2% | 57.7% |
| Non-Auck other owner/occ | 28.4% | 34.2% | 34.2% |
Okay, that's the FHBs and the owner-occupiers. Then our next table looks at the investor and those owner-occupiers with investment collateral. For this table we choose a more bracing DTI level and look at the percentages of those with debt-to-income ratios of over seven times.
The next table shows the percentage of new mortgage money for both investors and owner occupiers that have investment collateral that is on debt-to-income ratios over seven times:
| Group | Jun 22 | Mar 22 | Jun 21 |
|---|---|---|---|
| Investors nationwide | 16.8% | 26.4% | 36.5% |
| Auck investors | 23.0% | 35.7% | 46.8% |
| Non-Auck investors | 9.9% | 18.1% | 24.4% |
| Owner/occ + investment collateral nationwide | 14.7% | 26.2% | 37.4% |
| Auck owner/occ + investment collateral | 17.7% | 34.8% | 48.7% |
| Non-Auck owner/occ + investment collateral | 12.2% | 19.1% | 27.7% |
So, there we have it. A very sharp easing from very high DTI levels is under way. How much further has this current trend go to go? Well, we will certainly be keeping a close eye, and you can bet the RBNZ will be too. But the RBNZ will for now be happy that fewer people are taking such fearful risks with the amounts they are borrowing relative to what they earn.
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