They are finally here. So, what do we do? Well we can start by pretty much ignoring them. For now.
Nearly a decade in coming to fruition, the debt-to-income (DTI) mortgage restrictions officially took effect on July 1.
And the effect of them for the moment - is no effect. New figures for the month of July show the overall numbers of both owner-occupiers and investors above the targeted limits are negligible. So, it's a very quiet start for the new regime. But give it time. Currently we have a weak house market and interest rate levels not conducive to people borrowing amounts at vast multiples to their income. Not like before when interest rates were virtually non-existent.
The implementation of the new rules follows a long battle by the Reserve Bank (RBNZ). Our central bank didn't seek a DTI measure at the time it negotiated creation of a 'macro-prudential toolkit' with then Finance Minister Bill English in 2013, but soon after decided it did want one - only to then get government push-back against such a measure.
But the RBNZ was nothing if not grimly determined, and it got there in the end. And so now we have a DTI measure alongside other macro-prudential tools such as the already well-used loan to value ratio (LVR) limits.
The two measures will sit alongside each other and should theoretically complement each other well.
Introduction of the DTIs follows a period that saw the DTI ratios absolutely rocket for a while (peaking in 2021) but then fall away sharply. And the RBNZ ahead of time indicated the new rules would not be 'binding' in their initial phase. But of course, that won't always be the case and the the RBNZ can tweak the settings if it wishes.
About those settings:
Well to refresh memories, the DTI policy allows banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6 (that's a loan over six times annual income); 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.
In conjunction with this the LVR settings were eased for banks 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%.
Our unofficial calculation of how things stand based on the figures for July, is in that month only 3.1% of lending to owner-occupiers (including first home buyers) was on DTIs of above 6.
In terms of investors and owner-occupiers with investment property collateral, just 3.8% of the total amount borrow was on DTIs of above 7.
So, in terms of lending to both the owner-occupiers and the investors, the banks are not even close to running up against the 20% limits.
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.
The latest quarterly release of the DTI information was delayed as the DTIs took effect and so as well as including the June quarter information it also includes the month of July.
The RBNZ says now the DTI regime is under way it is aiming to publish new tables in the coming months with additional data from the DTI survey and at more timely intervals to complement its monthly loan-to-valuation data releases.
Anyway, we've been following these DTI figures from the start and compiling our own tables, looking specifically at first home buyers (FHBs) and other owner occupiers, borrowing at DTIs of over 5 (regarded as a 'high' DTI), while we've been looking at investors with DTIs of over 7.
As I've said before, fortuitously for us, of course the RBNZ' is now actually targeting DTIs of over 7 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 6. Okay, so we've started doing a table now that shows the percentages of FHBs and owner-occupiers with a DTI over 6, as well as keeping up with our over-5 table.
As we've done since the start of this data series we are comparing the last month of the quarter (June 2024) with the last month from the previous release (March 2024) and we are also comparing both these with June 2023 and June 2022. But, and there's more - since the RBNZ has released this latest information a month later and has given us July 2024 figures as well, these too have been included. It can be seen though that there's not a great difference between the June 2024 and July 2024 figures.
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 5 times:
| Group | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| FHBs nationwide | 16.5% | 16.3% | 22.5% | 29.9% | 46.9% |
| Auck FHBs | 22.5% | 26.2% | 35.3% | 43.7% | 60.3% |
| Non-Auck FHBs | 9.6% | 9.2% | 13.6% | 18.8% | 34.5% |
| Other owner/occ nationwide | 15.5% | 16.0% | 19.3% | 23.3% | 38.3% |
| Auck other owner/occ | 21.7% | 22.0% | 28.3% | 33.6% | 49.6% |
| Non-Auck other owner/occ | 10.5% | 11.2% | 12.1% | 14.9% | 28.4% |
Please note that our calculations in all three of our tables here exclude the (small) amount where the DTI size is unknown.
Okay, so, that's DTIs of 5.
Next up, we look at the figures for FHBs and owner-occupiers where the DTI is in excess of 6. This of course is the actual level on which the new official limits have been set.
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 6 times:
| Group | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| FHBs nationwide | 1.6% | 2.2% | 4.9% | 5.9% | 16.0% |
| Auck FHBs | 2.9% | 4.2% | 8.0% | 11.0% | 23.6% |
| Non-Auck FHBs | 0.5% | 0.9% | 2.7% | 2.3% | 9.0% |
| Other owner/occ nationwide | 3.9% | 5.1% | 6.5% | 8.6% | 18.6% |
| Auck other owner/occ | 4.4% | 6.8% | 9.1% | 13.0% | 26.4% |
| Non-Auck other owner/occ | 3.5% | 3.7% | 4.4% | 5.0% | 11.5% |
As we can see, this is beyond comfortable.
But if we look back at June 2022 we can see the Auckland figures blowing up beyond the 20% mark - although of course the figures are measured nationally. By June 2022 the peak highs had been left behind though.
In fact to just quickly throw back the attention to June 2021, in that month other owner occupiers with DTIs of over 6 made up around a quarter of the total - so over the 20% limit. And for investors it was a bit worse. Those with DTIs over 7 made up in excess of a third of the total. If therefore the current DTI limits had been in operation in 2021 they WOULD have been binding and banks would have had to ration the lending.
And so, what of the investors right now, anyway? Our final 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 7 - 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 | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| Investors nationwide | 3.5% | 3.7% | 8.7% | 9.0% | 16.8% |
| Auck investors | 3.4% | 4.8% | 10.4% | 13.6% | 23.0% |
| Non-Auck investors | 3.7% | 2.4% | 6.9% | 4.5% | 9.9% |
| Owner/occ + investment collateral nationwide | 4.2% | 6.3% | 8.8% | 7.3% | 14.7% |
| Auck owner/occ + investment collateral | 4.1% | 8.3% | 7.6% | 8.7% | 17.7% |
| Non-Auck owner/occ + investment collateral | 4.2% | 4.6% | 10.0% | 6.3% | 12.2% |
So, there we are. All very comfortable at the moment. For now the banks have nothing to worry about. No need to 'ration' the lending based on DTI numbers.
But as we know from what happened in the early part of this decade, things could change fast. And those DTI limits - apparently redundant at the moment - would become a big thing.
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