David Hargreaves says the Reserve Bank's decision to leave existing loan to value ratio restrictions in place means it's unlikely there will be further relaxation of the rules for at least a year

David Hargreaves says the Reserve Bank's decision to leave existing loan to value ratio restrictions in place means it's unlikely there will be further relaxation of the rules for at least a year

Things can move pretty quickly in the housing market.

It was only about a week and a half ago that yours truly was still confidently stating that I thought the Reserve Bank would further relax the loan to value ratio (LVR) limits for bank lending when releasing its six-monthly Financial Stability Report on Wednesday.

But the housing market data that has been more recently forthcoming for the month of October has painted a picture of an awakening giant. And some bank economists that had earlier expected the RBNZ to relax the LVRs had changed their minds ahead of the decision.

I had earlier thought that the RBNZ might be prepared to let the housing market run 'a little hot' for a while to give a little stimulus to the economy. The trouble is, with houses, a 'little hot' can become a 'lot hot' in no time at all. Obviously the RBNZ was not prepared to take the risk.

The RBNZ will have very much noted the very sharp rise in house price expectations in its latest household inflation expectation survey released on November 20, while the October monthly mortgage figures, released on Tuesday also painted the picture of a market very much perking up. 

A big month for mortgages

As far as I can see, in dollar terms, the $6 billion advanced by the banks in October might have been the most ever for an October month. Of course $6 billion gets you a lot less house (particularly in Auckland) than it once did, so you would expect the figures to be bigger.

But if we go back to the years 2013-2015, when the housing market was really flying, we can see that in October 2013 there was $4.6 billion advanced, October 2014, $4.9 billion and October 2015, $5.9 billion. The $6 billion borrowed in October 2019 was only the second time this year the $6 billion mark had been breached (the other time was in May).

Clearly the 75 basis points of cuts the RBNZ has made this year to the Official Cash Rate between May and August, taking it down to 1%, are starting to have a real impact. And remember there was a loosening of the LVR limits that was applied from January this year too, which will have been stimulatory.

I wouldn't be surprised if the RBNZ hasn't been somewhat taken aback by how quickly housing sentiment seems to have shifted.

RBNZ changes course

It was only in May, in its previous Financial Stability Report, that the RBNZ said this:

"If household lending risks continue to fall gradually, LVR restrictions will continue to be steadily eased. That will require household lending and house price growth to remain at sustainable levels, and banks to maintain prudent lending standards. We expect to review LVR restrictions every six months, unless conditions change suddenly." (Bold type is mine for emphasis).

Compare that with this comment in the November FSR released on Wednesday:

"...Given the uncertainty around the future trend in housing lending risk, it would not be appropriate to ease LVR restrictions further at this point. We will continue to review LVR restrictions, and will adjust them in line with changes in the overall risk environment."

All reference to the restrictions continuing to be "steadily eased" has gone. Indeed you could read that sentence as leaving the door open for an actual increase in the LVR limits, should the need arise.

With the recently emerging signs of life in the housing market it would have been really risking pouring petrol on the market to relax the LVRs further at this stage.

And the way the market has perked up, it's now very difficult to see the RBNZ giving consideration to further relaxation of the LVRs in its next Financial Stability Report in May 2020. It will want to see how the housing market goes through the complete summer season.

No change for a year

So, the earliest point a which the LVRs might now be relaxed again would likely not be till November 2020. 

But a lot of other things will have happened by then and it might no longer be as relevant.

One thing that will be worth keeping an eye on in coming months is the new data series the RBNZ has started compiling looking at lending by debt-to-income.

To be honest I think this series could be improved in terms of how the data is presented, to make it more readily accessible. 

At the moment, in order to track changes from month to month, certainly I've found it necessary to add figures up and then calculate percentages in order to attempt to paint some kind of picture that isn't clear from the raw data. 

I've only looked closely at the first home buyer figures, since I would take the FHBs to be the most vulnerable buyers. The data goes back to 2017. The general pattern since 2017 has been of DTIs on mortgages gradually easing back from very high levels.

A spike for FHBs

However, looking at mortgage money advanced to FHBs on high DTIs - that's over five times income - there was a notable spike in September.

Across the country as a whole the amount of money borrowed by FHBs on a DTI of over five rose from 31.9% of the total borrowed in August to 35.5% of the total borrowed in September, which was the highest percentage figure in two years. And bearing in mind those figures have been pretty high anyway. 

In terms of the pricey Auckland market, DTIs have generally been falling from very high levels, but again in September the percentage of over five DTI money advanced to FHBs lifted sharply from 47.8% in August to 51.3%, which is the highest percentage since November 2017.

We will have to wait and see over coming months whether this spike in the DTIs subsides, but maybe not. It would have been a further warning sign for the RBNZ.

And those DTI levels will want watching in the months ahead.

Bring on the DTIs

The RBNZ reaffirmed at the media briefing after the release of the FSR that it has not given up on the idea of some kind of DTI-related measure in its 'macro-prudential toolkit' alongside such other measures as the LVRs. This subject has now been put into the considerations for the second part of the Reserve Bank Act review that's currently well under way.

The absence of some sort of income-related measure from the range of macro-prudential tools agreed to with the Government in 2013 has looked over time to be an ever-more glaring omission.

It is to be hoped the Government does now look favourably on the idea and that we do see some sort of DTI measure included in the macro-prudential toolkit. 

Presumably at that point the RBNZ might then feel comfortable with 'switching off' the LVRs.

In the meantime it will be interesting to see what does happen in the housing market over summer and whether the early signs of life turn into a full-blown rising market again or not. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

55 Comments

Comment Filter

Highlight new comments in the last hr(s).
14
up

While few seem to agree, implementation of DTI limits will greatly assist FHBs in saving for houses. With a DTI limit, house prices will be constrained from bounding ahead of FHB savings for a deposit.

"With a DTI limit, house prices will be constrained from bounding ahead of FHB savings for a deposit."

It all depends on the proportion of sales and mortgages being issued to FHBs as opposed to investors, I guess.
Presumably, those with deep pockets looking to increase their portfolios will continue to drive prices in seeking tax free gains. I'd expect that investors are less likely to be constrained by / base investment decisions on DTI ratios

I'd expect investors will be far more constrained by DTI ratios.
How is a guy earning $80k p.a. going to add to his portfolio of 5 houses?

Especially if the RBNZ's toolkit allows them to discriminate against investors in the same way that they already do with LVRs.

True.
It would make sense for example if the income factor was ringfenced to the property under consideration for investors, rather than total income.

Saying that, I'd be amazed if anyone on 80k has 5 properties (or rather, has been able to leverage 80k of salary into 5 properties at any time in the last 5 years outside of areas with <200k property.)

Yeah, although rental yields of <3% don't assist the lender in a DTI calc... they help highlight the madness of the situation.

Correct cmat, property investors are typically asset rich and cashflow poor and hence will suffer more from DTI

Retired and living off the proceeds of their property portfolio? They could have been on $200K when buying the properties.

"I'd expect investors will be far more constrained by DTI ratios.
How is a guy earning $80k p.a. going to add to his portfolio of 5 houses?"

Comment from a reader to Tony Alexander, a housing market commentator on changed credit conditions in NZ. Even if the borrower has low LVR, and positive cashflow property, there are now limits on borrowing from lenders, due to stricter application of debt servicing criteria.

“LVR’s don’t matter to property investors anymore – it is completely a serviceability game now and the banks have initiated their own DTI’s that make getting 3 plus houses near impossible (Investors with positive cash flow and 50% LVR over 10+ houses can’t get a cent whereas 4 years ago they could have got 2m to spend)”

http://www.tonyalexander.nz/resources/TV%207%20November%202019.pdf

Why not be consistent and call "DTI""LIR"?
"LVR" = Loan to Value Ratio.
"LIR" = Loan to Income Ratio
Make no mistake D = L, they are the same, namely mortgages.
In the first we compare the amount of loan to the value of the asset, in the second were compare the value of the loan with the income.

10
up

Debt is more than just a mortgage(s). It is also undrawn facilities eg: credit card limits, unused. A Loan, in isolation, just compares the requested amount against the purchase price( if that is what Value is!?)
Besides, the "I" bit is going to be a crucial factor in a future where household incomes - fall.
That, in itself, is going to have not only a psychological impact on housing but also a regulatory one, if DTI is adopted ( which it will be!)

Agreed that "D"ebt is more than just mortgage but then so is "L"oans when it comes to banks assessing your exposure as they look at all your liabilities. (actually liabilities is the best wording)

LVR is applied only to mortgages for regulatory purposes. i.e. the size of the home loan v the value of the mortgaged property (ies).

yes, so?

Interesting point, particularly for all the 20-30 year old FHBs with $20-50k (or more) student loan debt.

Tomayto
Tomahto

The Reserve Bank Governors job is to encourage a market environment that is good for everyone, not just the banksters.

The youth havent experienced a downturn, and are vulnerable to peddlers such as real estate agents, banksters and keeping up with the jones. While it may not help the current housing market prices from falling; due to the lack of affordability, at least he is encouraging the youth of today to save a bigger deposit

As far as I can see, in dollar terms, the $6 billion advanced by the banks in October might have been the most ever for an October month. Of course $6 billion gets you a lot less house (particularly in Auckland) than it once did, so you would expect the figures to be bigger.

Yes indeed: the RBNZ has cut the OCR in half three times since July 2008, causing citizens to borrow from the future to spend today.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion. Link

a 'little hot' can become a 'lot hot' in no time at all
Especially when demand for housing is elastic to changes such as price and credit availability, while supply is relatively inelastic to those factors.

Not sure I agree that demand for housing is price elastic.

"The price response characteristics of owner occupied and rental housing are also, not surprisingly, somewhat different. The demand for both housing types are price inelastic but the demand for rental housing is only half as elastic as it is for owner occupied housing (-0.5 compared to -0.9, approximately)"

Investment property probably more elastic though.

https://www.econstor.eu/bitstream/10419/66099/1/509603211.pdf

Excellent Article.

Agree that some sort of DTI to be used to protect FHB (Though some may have problem in getting loan approved with DTI restriction but is it not better than taking loan and going bust). Have witnessed many who in last few years specially now with low interest rates are borrowing to extreme. Investors with few house may not have that much problem but FHB specially those FHB who will be buying now under FOMO will be worst hit, if housing market gets hot again from here on.

Labour party was earlier in favour of DTI but seems, now if approached will shy like they have done away with CG as they too now know very well that the ONLY way to a Rock Star economy is through housing ponzi as it effects everyone and is and will always be hot issue (Nothing much in NZ for average locals).

At the moment feeling is that 'Little Hot 'can become and is becoming 'Lot Hot' so in the absence of DTI - RBNZ is going in for capial control BUT could go in for much tighter Capital Control next week than the market is expecting (Just like dropping the OCR by 0.5% instead of 0.25% as market was expecting) if they do not want it becoming"Lot Hot" so is upto RBNZ as to what extra measures they put in place like maintaining LVR, having realized the potential of house price going out of control AGAIN.

Would fully support bringing in DTI, and then dropping LVRs. This would be very targeted at and effectively managed the debt stacking, interest only, doubles every ten, not making any more seminar believer type. In effect, save them from their own greed, and promote investment into other things...like businesses.

Agreed it would help FHB. Its will place FHBs (who have diligently saved a good deposit) in a better position v.s. investor debt stacking for the first time in a very long time. It will make the rent transition to mortgage much easier to justify, and promote the security and stability that home ownership brings.

"then dropping LVRs"

Just to clarify your comment. So LVRs for FHB (first home buyer) would fall from 80% currently to say 70%?

No. Fhb have a lower equity level threshold to promote home ownership over investors.

Having cheap loan(Lower interest) but higher principal (Result of Rising House price) is not what will help FHB in long run as will be too much under debt and if for any reason interest rate starts to rise will be ...................

DTI or any other tool is need of the time and RBNZ meanwhile can control capital to minimize large amount of borrowing going into passive investment by average person.

We can only pray that common sense will ultimately, *finally*, prevail.

Even if it is at least 10 years too late.

We can only pray that common sense will ultimately, *finally*, prevail.

We still have the same brand of politicans with same vested interest So.........................

Need Change from current breed of proffesional politicians - for good or bad - ready to take the chance

Need leaders.

Not just puppets who are beholden to populist polling.

Create your own party

In the current non-DTI environment, lowering interest rates does not make people pay down debt or increase consumer spending. Instead it just drives house prices higher.

Adding a DTI would add an upper limit to your borrowing power so you can't just keeping buying more/more expensive houses. This should then lead to deleveraging and extra spending following rate cuts.

Boomers will not allow DTI’s to be introduced just as they stopped capital gains tax. We have done very well as a generation and those who were born after us will just have to wear it and keep struggling.

DTIs will be framed by the media as being mean to FHBs - the usual war of misinformation, ignorance & illiteracy.

Just as we've seen in the past 24 hours with no loosening of LVRs.
Both TVNZ and The Herald have come out claiming that it locks out FHBs... when the opposite is true.

Media in NZ is mostly control be few and have vested interested and no leader is able to stand up to that lobby. Best example is scrapping of CG.

CG though needed but under pressure from powerful vested lobby, had to not only think but even ruled out altogether. This is also one for of corruption as policies are framed by people who have vested interest .

Well Church said that and as usual pumped out a load of half truths.
Liam Dann viewed it positively for FHBs

Frits, you're the MASTER of half truths and phoney predictions.

True, it was an interesting section front page layout with the misleading headline that this was making it hard for first home buyers, coupled with a panel in the middle where Liam Dann pointed out the opposite. The Granny Herald is looking less reputable the longer it goes on spinning.

Good thing the RBNZ is independent from the government, and can make this decision regardless.

Untrue, the RBNZ cannot bring in DTI, only he government can, once this is done the RBNZ is free to use it as its sees fit

Ouh.. finally quick break from work... yes, please.. RBNZ always uttering the needs of this tools discussion even under the last Nat co. - some will say.. we becoming nanny state etc.. those that against it (for obvious reasons), then we can simply pointed out.. why the following exist?; traffic lights, Air traffic controller, FDA.. FMA why they've been created in the first place, what is the reason? - answer, Addiction. The only way is to insert a regulatory body, rules, law.. they're all there.. to protect.. those that hopeless in this case $ addiction, a little suggestion of CGT.. look how the market react to it, will not be much different to this DTI. This tool will only come about... after the aftermath, like the recent gun prohibition law, it's nothing change the past 30 yrs, after Aramoana.. etc. - You need a bigger aftermath that affect NZ significantly economic wise, before even DTI to be considered by respective govt. then deployed in the hands of RBNZ.. ask any Nat co supporters. Why it's no no go zone for them. Ouch finish my break..bye.

Is the committee of rate setters composed of people with a vested interest in house prices going up? If so, will this not influence their decision making?

The country needs property investors badly, as without them there are going to be so many more living on the streets.
This government is handling the so-called housing crisis abysmally and things are going to get worse if Faafoi, Twatford and Woods are leftwith the housing decisions for the COL!
Investors do not force prices of houses up, quite the opposite!
True investors want property as cheap as they can get it whereas short term speculators and owner occupiers are the ones who are paying overs for houses in Auckland.

The question as to whether investors "force prices up" relates to what investors use as "money". If they can leverage their increased equity (from capital gains) in their houses to obtain credit to buy more houses then, absolutely, they do force prices up and FHBs out of the market.

"If they can leverage their increased equity (from capital gains) in their houses to obtain credit to buy more houses then, absolutely, they do force prices up and FHBs out of the market."

Yes, commonly referred to as recycling deposits, equity release.

As long as banks were more focused more on LVR and less on debt servicing, then this led to a positive property price spiral. In an environment of rapidly rising property prices, it was very common for property investors to get their investment properties revalued frequently and borrow on the increased valuation to use as a deposit for their next investment property. (I recall property investors asking around which valuers had more favourable / higher valuations, then the banks mandated that valuer selection was to be undertaken by the bank, rather than the borrower). Many of these investment property purchases were financed with interest only loans, and some capital gain oriented investors were willing to purchase investment properties at prices which resulted in the investment property making cashflow losses. This continued as long as property prices kept rising and created FOMO by potential owner occupier buyers.

Once property prices plateaued in the local market, then the game moved to residential properties in other geographical markets - firstly for investors in Auckland residential property to Hamilton, Tauranga, then Rotorua, then the smaller towns. Look at the towns which have experienced rapid property price rises in the last few years - Masterton, Hawkes Bay, Gisborne, Wanganui, & Invercargill. Rapid property price rises have given to FOMO by local residents in these communities and it is quite common to see capital gain oriented property investors from out of town chasing the area with the highest recent capital gains, creating buying competition amongst active buyers (local owner occupiers vs property investors from out of town). As a result of deposit recycling, rising property prices, and a belief that property prices don't fall by much, this has led to a concentration of debt - 8% of households in NZ owe 40% of the mortgage debt. What happens when property price rises stop in these smaller towns? Where will capital gain oriented property investors go? I've heard some are already moving to commercial real estate.

Now that property prices have plateaued in Auckland, the game is property development - buying a property with large land size and adding additional new dwellings on the existing land or removing / demolishing the building and building a larger number of new dwellings on the existing land. Here is one recent example - https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12288577 (I read a comment somewhere that the commenter believed the owner purposely didn't maintain the building ...)

Now debt servicing criteria from the banks has tightened considerably from 4 years ago for property investors. Not sure what was the force motivating banks to act - perhaps the Haynes Commission out of Australia (given that the large 4 banks in NZ are owned by the Australian banks), APG23 out of APRA in Australia, implementation of Responsible Lending Code in NZ, talk by the RBNZ of higher capital requirements by banks or imposition of DTI, etc.

Comment from a reader to Tony Alexander, a housing market commentator on changed credit conditions in NZ. Even if the borrower has low LVR, and positive cashflow property, there are now limits on borrowing from lenders, due to stricter application of debt servicing criteria.

“LVR’s don’t matter to property investors anymore – it is completely a serviceability game now and the banks have initiated their own DTI’s that make getting 3 plus houses near impossible (Investors with positive cash flow and 50% LVR over 10+ houses can’t get a cent whereas 4 years ago they could have got 2m to spend)”

http://www.tonyalexander.nz/resources/TV%207%20November%202019.pdf

One can only imagine where our national property values would be if the boomers had faced DTI's in the 2000's. I recall one client who was a professional in his 50's. Single, no children and a good income. Around 2004/2005 he started off with a humble home in a small provincial town. It grew in value so he had it valued and used it a deposit for his first rental. That went up in value so both were revalued and another rental was bought with full borrowing. By 2008 /2009 he had 38 rentals and a lot of debt. I asked him how many he wanted and he said 50. It was now just a game. Then the GFC hit the world and the National Bank said to him no more lending and they forced him to sell most of his portfolio one by one. The lowering of interest rates saved him in that it helped the Bank gave him more time to sell off the properties they wanted him to sell. We boomers were lucky. Assets were cheap and we had the equity to buy them with bank assistance. What has always worried me is the number of people and some of them were clients of mine who bought multiples of tens of rental properties. What did that do to house prices in New Zealand? Recently we heard about a couple in the Bay who have in excess of 80 rentals. Do they need all of those to have the standard of living they obviously want? What has their portfolio done to the Bay housing market by itself? I am aware of some landlords in Auckland who have in excess of 100 rentals and some have well over that figure. Why are we boomers so greedy? We might have done well but our children and grandchildren have had their lives made a lot harder in terms of housing by our excesses.

Hi Gordon I understood that there is just a tiny number of landlords who have more than a couple of rentals.

How many houses is enough to provide for ones retirement? 1, 5, 20, 100....?

I think the "its a game" comment shows how out of control some people got with the leverage debt to save income tax agenda that has been changed under the COL. Personally know of several boomers (one is a RE agent) that "joked about earning hundreds of thousands and paying no tax" because of the debt leverage offset, and called everyone else "suckers". I would suggest that it is them that is the sucker. Will be voting for which ever party continues to tighten down on this sort of investment abuse and promotes the interest of FHBs ahead of property speculators.

Pls note this is not a shot at Professional Investors (providing clean, warm tidy housing for those that cant help them selves). It is unfortunate that they are being caught up in the changes used to manage the group highlighted above.

Great post.

We boomers were lucky. Assets were cheap and we had the equity to buy them with bank assistance.

Indeed. And assets were cheap in part because the supply had been boosted by a mixture of government and private efforts to deliberately aid home ownership affordability, over the past 50+ years.

That's why people get frustrated at some who seem to think policy should now be all about pushing up their portfolio values. It's a change from the country targeting affordable home ownership for the many to inflated property portfolios for the few.

Yeah, nah.

What was not done in 2013 could be done in 2019. It is never too late but the question to be asked, does the current government along with RBNZ have intent to act and solve or do just lip service and let housing ponzi continue.

RBNZ can very well put extra pressure by capital control as was reading a comment, if RBNZ can reduce the OCR by 0.50% instead of 0.25% and surprise the market / price growth as a result can do similar by putting More capital control than what market is expecting to control the lending. Also by doing it, low interest rate will go or should go more towards business instead of passive investment.

The Government needs to up the First Home Loan and First Home Grant income caps if they are going to be adding DTI restrictions. Someone on $80000 with a 5% deposit for a $500000 home is way over the DTI of 5, especially since the bank will slap on however many extra % for the LEP.

Notwithstanding a mini surge in Auckland, it looks like the policy settings are conspiring against another boom.

Mini surge... Yes... Will it last?

Have doubts as fundamentals have not changed and this time if it reverse and fall will be meaningful.

Agree

Frits it is not all just about the drive to make capital gain. Most homeowners and fhb buy a home for life... here are some real life experiences on Kerre McIvor radio program today which I have attached the link for your benefit mate. From 9am onwards enjoy.
Week on Demand
https://www.newstalkzb.co.nz/on-demand/week-on-demand/

A DTI stipulation by RBNZ is necessary only if it believes that banks currently do not take into account the total debts of a prospective borrower and their ability to service them against the total income.
This is called prudent lending assessment.

And granting that banks do this, (with some dodgy fiddling at the margins), the best measure to be imposed would be not lending more than 4/5 times the earnings for purchase of a house. That would also dampen house price inflation and increase the borrower's skin in the game.

Debt to income ratios are not used to work out how much someone can afford to borrow by the banks in their credit assessment.

Debt to income ratios are used by the RBNZ to assess risk to the overall financial stability of the banking system.