David Hargreaves wonders whether the belated introduction of debt-to-income ratio controls will be a case of better-late-than-never, or whether they've already missed the proverbial bus

We could be excused for wondering why the Reserve Bank has just gone through a years-long battle to implement a policy that will have negligible effect.

But that would be over-simplifying things.

The RBNZ's announcement that it plans to implement a debt-to-income (DTI) measure as part of its 'macro-prudential policy kit' later this year - but at a level that won't be 'binding' - is the culmination of a battle the central bank has been waging since about 2016.

And it's a battle that wouldn't have been necessary if the RBNZ had not, inexplicably, decided it would not seek to include a DTI instrument in its macropru toolkit when this was being agreed to with then Finance Minister Bill English in 2013. It seems likely that a DTI measure would have been agreed to at that time had the RBNZ gone for it.

But it didn't and I suppose after the National Government had a bit of a look at the kind of impact and some ructions caused by the loan to value ratio (LVR) restrictions that WERE slipped into the macropru arsenal, and were of course implemented from 2013 onward, it got rather cold feet and pushed back at the RBNZ's subsequent suggestions that it really would rather like DTIs after all.

So, then of course, Labour didn't fancy them either once it got into Government and it was not till 2021 that the RBNZ was finally able to squeeze then Finance Minister Grant Robertson's arm behind his back and get, it seemed, very reticent, approval.

And since then the RBNZ's moved very slowly and is now ready to, finally load DTIs into the system. But they won't have any impact.

Pointless? No. This won't matter to the RBNZ, because it's finally got what it wanted.

The RBNZ can't implement macropru measures that are not included in its Memorandum of Understanding with the Finance Minister. That's the important thing to remember.

But once a measure is in there it can be implemented without Government approval. And of course it can be changed - to be more strict or more loose as needs determine. Which is the important bit.

When the New Zealand housing market gets hot again - and as night follows day, it will, because that's what happens in NZ - then the RBNZ can turn up the heat with the DTIs.

We really could have done with DTIs being in place some years back when interest rates were virtually non existent and therefore anybody could at a pinch service a loan on an absolute truckload of money. That is most certainly not the case today. At the moment the high interest rates effectively make a DTI policy redundant.

The most recent DTI mortgage figures from the RBNZ showed that the DTI ratios have continued to fall since hitting very high levels in 2021 at the peak of the pandemic housing frenzy.

Whether DTIs could have saved some people from themselves during the 2020-21 frenzy is something we can speculate over. It is fair to say that at this stage anyway RBNZ-compiled figures would suggest that mortgage delinquencies are up, but not at extreme levels.

What about in future then?

That housing market will, as mentioned earlier, take off again at some stage. It's an inevitable consequence of New Zealand's property-driven mentality.

What the Government's reaction might be if the RBNZ does start to squeeze hard on those DTI ratios - IE with much lower limits than will be initially implemented - will be interesting.

The first home buyers will be the crucial factor - and this time the RBNZ might have them covered off rather better than it has in the past.

When the LVR limits were first implemented way back in 2013 they were introduced with a blanket limit for all categories of borrower. The first home buyers complained that they were disadvantaged. The RBNZ itself much later conceded that the initial iteration of the LVRs had "disproportionately restricted" purchases by FHBs.

I would argue that the LVRs properly came into their own once the extra restrictions were piled on to investors in mid-2016. At the time this appeared a somewhat desperate and panicky move by a central bank that was watching the housing market blaze away. But it worked. And we still have the two-tier restrictions in place to this day.

So, crucially the DTIs have been developed with a similar two-tier system. If the RBNZ reckons investors are really starting to drive up prices it can ramp up the DTI limits they face.

For the FHBs, I reckon it will be largely hands-off. The current Memorandum of Understanding with the Finance Minister from back in 2021 states that "in the design and implementation of a debt serviceability restriction, the Bank [RBNZ] will have regard to avoiding negative impacts, as much as possible, on first home buyers..."

I'm sure this Government, like other governments before it, will be thoroughly cognisant of the extremely toxic impact of televised images of young couples, babe in arms, pictured in front of homes they can't buy.

Whether there's much the Government could do to stop the RBNZ if it wants to ramp up DTI settings is an interesting point. In reality, it would appear not - not without renegotiating the whole Memorandum of Understanding.

But I reckon as long as the FHBs are protected from the worst impacts of any DTI restrictions (and we can debate whether that's necessarily a good thing or not), the Government's not going to have much to complain about.

For the moment much of this talk is redundant. While interest rates remain at current levels the banks' debt serviceability tests are doing the job in ensuring that people can't overload themselves.

The key thing to watch is once interest rates start to come down again.

But how far down will interest rates go?

It's the subject for potentially a fairly strenuous debate, but my feeling is that the super, super low interest rates we saw in recent years won't be repeated.

Therefore the DTIs are never likely to come into their own again in quite the same way they could have during that low interest rate regime.

Well done to the RBNZ for sheer dogged perseverance, but I do wonder if DTIs can ever be quite as effective again as they might have been some years ago.

And that thought leads me to say that I hope there's no resting on laurels here for the RBNZ in terms of finally getting the long sought measure in place.

The world changes all the time. What is a good method of dealing with something one year might be thoroughly out of date by even the next year.

What I mean is that it would be a mistake if the RBNZ thinks it has now 'made it' and has its macropru kit complete and ready for all contingencies.

The RBNZ needs to remain alert to the possibility that in future their may be better things than DTIs to do the job of preserving financial stability.

And it would not want to miss the bus with those because it has been distracted by the length of time it took to get DTIs in place.

I genuinely hope the DTIs do prove useful given the amount of effort it took to get them in place.

But I do wonder if the best time to have had them has already been and gone.