The new debt-to-income ratio limits soon to be introduced by the Reserve Bank (RBNZ) are going to have a pretty low-impact start, judging by the latest series of DTI figures released by the central bank.
In fact, at the moment, the limits don't look necessary - but of course in future they may well be.
The latest quarterly figures released by the RBNZ, these for the March quarter, show at the moment the numbers of new mortgages on high DTIs are well below the proposed limits. This squares with the RBNZ's earlier assertion that the DTI limits are not likely to be "binding" in their initial phase.
That, of course, could and likely will change - and it's not so long ago that the numbers of new mortgages on high DTIs was rocketing.
As we know, the RBNZ has hankered for some years for a DTI measure to add to its 'macro-prudential toolkit' alongside such already well-used measures such as the loan to value ratio (LVR).
Following a final round of public consultation earlier this year, the RBNZ has indicated it's going to be ready to push the go button by "the middle of this year". That's very soon now.
To refresh memories, the RBNZ proposes initially setting the DTI policy to allow banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6; and
- 20% of their residential loans to investors with a DTI greater than 7.
These percentages refer to new lending, not the total bank lending book.
They also announced they are proposing easing the loan to value ratio (LVR) settings at the same time as activating DTIs. The RBNZ proposes easing LVRs to allow:
- 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
- 5% of investor lending to borrowers with an LVR greater than 70%.
So, before we get to that point, it's very timely to have a look at just what the borrowers are doing out there.
The RBNZ has been compiling DTI information since 2017. The information is monthly, but released quarterly. In very broad terms the information released since that time has shown a period where DTI ratios fell - roughly from the 2017-19 period and then they started to absolutely rocket in the 2020-21 period before falling to much lower levels more recently.
We've been following these DTI figures from the start and compiling our own tables, looking specifically at for first home buyers (FHBs) and other owner occupiers, borrowing at DTIs of over five (regarded as a 'high' DTI), while we've been looking at investors with DTIs of over seven.
Fortuitously for us, of course the RBNZ's actually targeting DTIs of over seven for investors, so, that makes our ongoing investor table very salient. But for the FHBs and other owner-occupiers the official target is going to be a DTI of over six. Okay, so we've started doing at table now that shows the percentages of FHBs and owner-occupiers with a DTI over six.
For old time's sake, however, were are also keeping up with our FHB/other owner-occupier table showing the latest figures for ratios of of over five.
As we've done since the start of this data series we are comparing the latest month's figures (March 2024) with the last month from the previous release (December 2023) and we are also comparing both these with March 2023 and March 2022.
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 | Mar 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| FHBs nationwide | 22.5% | 23.9% | 28.4% | 53.9% |
| Auck FHBs | 35.3% | 34.1% | 41.3% | 67.7% |
| Non-Auck FHBs | 13.6% | 15.9% | 18.3% | 41.9% |
| Other owner/occ nationwide | 19.3% | 20.9% | 22.5% | 44.1% |
| Auck other owner/occ | 28.3% | 30.4% | 29.9% | 57.2% |
| Non-Auck other owner/occ | 12.1% | 14.0% | 16.9% | 34.2% |
Please note that our calculations in all three of our tables here exclude the (small) amount where the DTI size is unknown.
What do we think? That nationwide FHB figure is the lowest since the RBNZ started compiling this information and a long way down from where we've come - as you can see from the March 2022 figure where over half the FHB mortgage money was on a DTI of over five.
I would suspect we are pretty much at 'the bottom' now though in terms of how low these figures might get. We shall see.
But anyway, moving on, let's look at the figures for FHBs and owner-occupiers where the DTI is in excess of six. This is where the rubber meets the road because this is going to be the new official limit once the DTIs are introduced.
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 six times:
| Group | Mar 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| FHBs nationwide | 4.9% | 6.1% | 7.6% | 23.5% |
| Auck FHBs | 8.0% | 9.6% | 12.7% | 33.7% |
| Non-Auck FHBs | 2.7% | 3.3% | 3.7% | 14.6% |
| Other owner/occ nationwide | 6.5% | 7.8% | 6.3% | 23.3% |
| Auck other owner/occ | 9.1% | 11.0% | 9.7% | 33.7% |
| Non-Auck other owner/occ | 4.4% | 5.4% | 3.7% | 15.5% |
So, as we can see, none of these figures are anywhere near the 20% limit being set by the RBNZ, and it's difficult to see that situation changing in the next few months.
But we can also see that two years ago - in March 2022 the nationwide and Auckland figures were both OVER that RBNZ limit. So at that stage the limits would have had an impact of reining in the mortgages.
Anyway, that's the FHBs and the owner-occupiers. Our next table that as explained above we've been running for a while - but which now takes on greater relevance given that we've accidentally picked the 'right' DTI number of seven - looks at the investor and those owner-occupiers with investment collateral with debt-to-income ratios of over SEVEN times. Again our calculations exclude the (small) amount of mortgage money where the DTI size is not known.
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 | Mar 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| Investors nationwide | 8.7% | 5.9% | 10..0% | 26.4% |
| Auck investors | 10.4% | 9.5% | 13.4% | 35.7% |
| Non-Auck investors | 6.9% | 2.5% | 6.6% | 18.1% |
| Owner/occ + investment collateral nationwide | 8.8% | 8.1% | 10.4% | 26.2% |
| Auck owner/occ + investment collateral | 7.6% | 9.2% | 11.8% | 34.8% |
| Non-Auck owner/occ + investment collateral | 10.0% | 7.3% | 9.3% | 19.1% |
Interestingly, most of these figures have actually ticked up a bit since the previous quarter - though again they are still well below the new limits. But it reinforces the thought that perhaps we've seen the bottom of the cycle in terms of the reduction in high DTI borrowing.
And so, there we are once again. Next stop is the official announcement from the RBNZ as to when the limits are going to be put in place. That of course will make future releases of this data much more relevant. Interesting times await.
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