Well, we've barely noticed that they are there, but now it is time for the debt-to-income ratio limits (DTIs) to shine.
The Reserve Bank's DTIs, officially in place since July of 2024, are now clearly being seen by the central bank as the key component in keeping the housing market in line as the RBNZ, it seems, now looks to relegate the importance of the loan-to-value ratio (LVR) limits.
The optics of Tuesday's decision to reduce the LVR limits were, to say the least, strange - and possibly not helped by the hyper-enthusiasm of Finance Minister Nicola Willis in bigging them up.
Such was Willis's keenness in getting the Coalition Government involved in a decision made by the independent RBNZ that the interest.co.nz folk actually got her press release reacting to the news before we got anything from the RBNZ - leading to confused exchanges among ourselves of "...er, has the RBNZ actually announced this?" before the RBNZ statement duly arrived.
Willis was quick to focus on the benefits for the first home buyers (FHBs) of the loosening, saying it would "make more funding available to first-home buyers".
Will it? The RBNZ admitted some time ago that the very first iteration of the LVRs back in 2013 disadvantaged the FHBs and they didn't get a look in till the RBNZ in exasperation in 2016 cracked the investors across the bridge of their noses with a 40% deposit rule. To my great surprise (and possibly to the RBNZ's surprise too) this actually worked, taking the heat out of the market and allowing the FHBs to come into their own.
And the FHBs have been very active right through the 'down' period we've seen in the housing market since the pandemic panic 40% price surge in 2020-22.
There's no evidence FHBs have been held back by the LVR limits. They are held back by the difficulty in saving a deposit and by then servicing the presumably ample-sized mortgage they are forced to get. But the LVRs? Not a problem. And moving the 'speed limit' of the amount of LVR mortgages over 80% to 25% of new bank lending from 20% will, in a physical sense, change little.
A helping hand for the investors
Willis didn't focus as much on the 'relief' that's been given to the investors. But that's a more interesting development, for me. Investors still have a special deposit rule (but it has for some time now been just 30% rather than 40%) and the banks have been able to lend over the 70% LVR to the tune of just 5% of their new lending.
Really that's margin of error stuff. The banks can't afford to slip up and inadvertently lend too much, so in reality I would be surprised if they are doing more than 2%, or maybe 3% in high LVR lending to the investors.
The proposed new limit for the investors in theory doubles the amount of high LVR lending available to them from 5% to 10%.
In reality it will much more than double the amount of high LVR lending the banks could do, because they might target a limit now of say 7% or 8% - so, theoretically the amount of high LVR lending to the investors could something like quadruple.
And this is all happening at a time when the RBNZ has just made a thumping great 50 basis points cut to the Official Cash Rate (OCR), taking it down to 2.5% and with a high probability it will go to 2.25% at the last OCR review for 2025 on November 26.
It's difficult to see this move now as anything other than an attempt to re-fire the housing market.
The RBNZ itself has previously done a lot of research that showed our interest rates fell a lot more than in other places post the 2008 Global Financial Crisis - and our house prices rose a lot more.
Low interest rates are the petrol for the housing market's fire.
So, the OCR cuts are now providing that petrol. And yet the RBNZ chooses now to loosen the LVR restrictions in a falling interest rate environment? Logic says you would loosen the restrictions when interest rates are going up. Not when they are coming down.
What does this say about our economy?
To me, there's a rather depressing narrative playing in the background.
'We've tried getting the economy up and running again but we've decided/realised that our whole economy is based on us buying and selling houses from each other, so, let's start doing that again. COME ON.'
I think several of our commenters have viewed this move by the RBNZ as being 2020-22 all over again.
It is not, because things are different. We still do have LVRs in place, albeit watered down. And we've got the DTIs.
As of May 2020, we had neither. And we had an OCR of 0.25%. Did somebody say petrol and fire?
I think it should have been obvious enough to anybody at the time the LVR removal was announced that it would prove to be a mistake.
I don't buy the conspiracy theories that the RBNZ intended to launch the housing market with that move. What I think happened was it got a bit carried away with notions of it having a kind of 'Florence Nightingale' role to help the country and was, yes, definitely trying to put a 'floor' under a housing market that it was expecting to fall. Well, it put a bomb under it.
So, what will happen after these latest LVR moves?
Well, as said at the top, we will now get to see what happens with the DTIs, which it appears are the RBNZ's favoured 'macro-prudential' weapon of choice.
Come in DTIs
We could have done with the DTIs years ago. Inexplicably, when the RBNZ was looking at the development of a macro-prudential 'toolkit' with then Finance Minister Bill English in 2013, the central bank didn't give serious consideration to DTIs. It was a mistake. And once the RBNZ decided it did want them it got pushback first from the National Party and then later from Labour, hence DTIs only coming into play in July of last year.
For the record, as per the RBNZ website, this is the current iteration of the DTIs:
The DTI rules allow banks to lend up to:
- 20% of owner-occupier lending to borrowers with a DTI ratio greater than 6
- 20% of investor loans to investors with a DTI ratio greater than 7.
These are known as ‘speed limits’ which allow a portion of banks’ new lending to go towards home loans that exceed the DTI thresholds (also known as high-DTI lending).
As we see mortgage rates keep coming down, then so these rules will start to have a binding impact.
So, in theory, as I see it, there's no reason to expect the currently sleeping housing market will take off.
But this is New Zealand, and it's fair to say we never really get this right. We lurch between not doing houses (as seen in 2022-24) to having them on toast with our breakfast (2020-21).
Anyway, I don't have the sense of doom I had when the RBNZ removed LVRs in 2020.
But I am more than a little depressed that we still don't seem to have come up with a better idea for 'A New Zealand Economy' than flogging each other houses.
11 Comments
Panic has set in. The RBNZ is all alone in it's efforts to get demand back into the NZ economy and I don't think they have enough tools to do the job. The government is sitting watching and promising to reduce demand further as fast as it is able to and ensuring ongoing contraction in economic activity. The RBNZ needs a partner in its, now, desperate efforts to start recovery.
I'm glad the DTIs are still being talked about positively, it seemed to take a lot to get them over the line. My only confusion is why the DTIs are more relaxed for investors, while for LVRs the opposite is true. Was it a bit of politics to help convince the average multi-property owning MP? Or is there a logical reason why one measure would favour them while the other disadvantages them?
Personally I'd like to resolve the discrepancy by tightening up DTIs for investors.
When you have an uncontrollable ravenous dog - that you are unwilling to put down - you have to loosen the leash a little at a time so the poor animal doesn't suffocate under it's own strain.
With the economy in recession - it is hunting season - all the distressed sellers and falling house prices. There is the smell of blood in the air and they want at it.
I hear you K. If we load the sheeple up on cheap debt, that would give the Ponzi some impetus and positively impact the economy at the same time.
The cunning plan of our ruling elite and the boffins.
It's prudent to put the limits roughly where the people are prior to them. Otherwise DTI would be set at 4 and just wait for the housing market to tank. They can be gradually ratcheted down later.
There's an issue where investors sell a house, for instance, and the bank recalculates their theoretical limits and compares it to their current lending. If that customer is suddenly well beyond their means under the new rules, the bank gets a bit testy and treats them as high risk and over-leveraged. This leads them to say claim back more of the proceeds of the sale than they would've before, which can put the investor is an untenable position sometimes, eg. If it was a forced sale to fund earthquake remediation at another property. I've seen this play out as test rates increased in recent years.
It's prudent to put the limits roughly where the people are prior to them. Otherwise DTI would be set at 4 and just wait for the housing market to tank. They can be gradually ratcheted down later.
If the Ponzi were anchored to the the income growth of the marginal buyer, it wouldn't be a Ponzi. Of course it's nonsense to suggest it is, even if it makes intuitive sense that it should be.
DTI's are better because they are about the affordability of the loan. LVRs punish young people who have high incomes and want to get on with life.
I'm not sure how the timing is odd? The LVRs are meant to protect the banks from the risk of an overinflated housing market crashing. At the moment house prices are much lower than they were a few years back, and interest rates are heading down, so that risk must be much lower than it was, hence lower LVRs.
I don't get this article as Loan to Value ratios haven't changed
$160 billion sitting in term deposits with interest rates falling - looking for a new home?
Interesting though Sharsies had over 1 billion invested by August this year - I think a lot of younger people are looking to invest but they have many other options and are a lot more savy than my age group.
What do you invest in here? Seems to me Tech/aerospace are steadily growing. Dairy ok but sheep and beef, forestry and hort are hard work.
People still drink a lot of Coca cola and need to store data from selfies etc.
Why would anybody want to be 'firing up the house market" (aka. Prices go up)
The last burst of price rises ruined the hopes and dreams of many young New Zealanders. From which they will not recover.
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