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Latest Reserve Bank figures on household debt to income ratios show more mortgage money being borrowed at in excess of five times annual income - but Auckland may be reaching limits

Latest Reserve Bank figures on household debt to income ratios show more mortgage money being borrowed at in excess of five times annual income - but Auckland may be reaching limits

Around the country, house buyers are still borrowing ever higher amounts relative to their incomes, but Auckland may be reaching some sort of limit, a crunch of the latest Reserve Bank figures on residential mortgage lending by debt-to-income ratio (DTI) shows.

The RBNZ has been publishing detailed information on mortgages by DTI for only about three and a half years. 

While what you might regard as a 'high' DTI is subjective, the RBNZ monitors closely borrowing that is five times or more annual income.

What the trend in the monthly, but published quarterly, series has shown is that DTIs were at fairly elevated levels in 2017, but then dropped fairly markedly in 2018.

However, since then it has generally been onwards and upwards - particularly for the first home buyers (FHBs). 

And that is again the situation with the latest figures if we look at the picture nationally.

Auckland hits the ceiling?

However, there's some sign that the Auckland DTIs, which were already much higher than those in the rest of the country due to Auckland's much higher prices on average - are maybe hitting some kind of ceiling. Whether such a 'ceiling' might be a natural one as to the natural limits of what people can afford - or is being imposed by the banks - is not clear from the figures. 

'Ceiling' or not though, the Auckland figures are at high levels.

As mentioned, the RBNZ compiles these DTI figures monthly but publishes them quarterly. So, what I've done here is focus on the figures for September 2020 (the latest month) and compared them with June 2020 and also September 2019.

I've looked closely at the DTI ratios by amounts of money borrowed, though also have cast my eye on DTIs by number of mortgage applications.

The table below shows the percentage of new mortgage money with debt-to-income ratios of over five times:

Group Sep 20 Jun 20 Sep 19
FHBs nationwide 43.3% 40.8% 35.5%
Auck FHBs 57.5%  58.5% 51.3%
Non-Auck FHBs 32.3% 28.6% 22.0%
Other owner/occ nationwide 37.7% 35.9% 29.8%
Auck other owner/occ  49.0% 51.3% 43.3%
Non-Auck other owner/occ 30.3% 26.0% 20.5%

So, talking to the figures in that table, we can see that the FHBs borrowing mortgages at DTIs above five have, nationwide, really blown out in the past year, with now 43.3% of FHB mortgage money (just over $600 million) borrowed at a DTI of over five as of September, up from 40.8% in June and just 35.5% (which equated to $345 million) as at September 2019.

In terms of the Auckland FHBs - well they are borrowing eye watering amounts, but now maybe a limit is being reached, albeit at a stratospheric level. As the table shows, 57.5% of new mortgage money borrowed by Auckland FHBs in September was at a DTI of over five. But this is down from the 58.5% in June. In September 2019 it was 51.3%.

If we look at non-Auckland FHBs, well that's onward and upward, from lower levels. The amount of non-Auckland FHB new mortgage money at a DTI of above five was just 22% in September 2019, but had moved up to 28.6% by June 2020 and has gone further, to 32.3% as of September 2020.

A similar trend (as can be seen from the table) can be observed from the figures for other owner-occupiers as well. This again shows the Auckland figures seemingly plateauing at high levels while the figures in the rest of the country are moving up quite quickly.

Looking at the numbers

The figures for mortgages by actual number (as opposed to dollar amount) show similar trends - albeit the percentage figures are not as high. 

For example in September 2020 FHBs around the country took up 3046 new mortgages, of which 1100 (36.1%) were at a DTI of over five. This percentage figure was up from 33.6% in June and 28.3% in September 2019. Again the Auckland figures are much higher, but have plateaued, with 53.7% of Auckland FHB mortgages in September 2020 (526 by number) at a DTI above five. This is down from 55.9% in June but up on the 49.3% in September 2019.

But again, outside of Auckland, it is still onwards and upwards for the high DTI lending, with 574 FHBs (27.8% of the total) taking up mortgages at at DTI above five in September, up from 24.3% in June and just 17.9% in September a year ago.

What sort of levels would the RBNZ be happy with? It will undoubtedly be closely watching these stats.

As we know, the RBNZ last week signalled reintroduction of high loan to value ratio (LVR) limits.

The RBNZ has long been enthusiastic about having some kind of DTI control measure available (though not for immediate use) in its 'macro-prudential toolkit' - along with the LVRs. The current upward trend in borrowing at high DTIs is presumably only reinforcing that. The issue of a possible DTI measure is included in the ongoing review of Reserve Bank legislation.  

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The higher DTI the better, when you've got a protected asset class leverage=gains.

Leveraged gambling.

A totally accurate description of the whole financial system now ... a leveraged gamble on the ability of the future to deliver ...
And given it is wobbling, we need to go harder on the leverage

Enough this talk about limits

@DoTheMath, Exactly, Its causing me to lose faith in the currency.

Nice when you reach the stage of eliminating your mortgage or have 80%+ equity. Does that mean no longer part of the mortgage belt?!
And no desire to stretch & become a landlord in these risky times.


"57.5% of new mortgage money borrowed by Auckland FHBs in September was at a DTI of over five..."

this means lifelong mortgage servitude for an increasing portion of the population, with corresponding less money available for investment and consumption in the future.
Bravo Orr, keep up the good work.


This was my argument too.The real economy isn't going to get a cent of this low interest stimulus, businesses will lay-off staff. Oh dear those staff employee's have mortgages to pay....and there lays the problem..

What is your definition of "lifelong"? If you believe a mortgage should be discharged in less than 15 yrs (minimum) I'm afraid you're being a bit delusional.


How is this delusional? This is the way it used to be for previous generations, it has been just recently that we had to increase mortgages to 30y so we can pay the overpriced cost of property.


Yep. Income multiples too high? Add an etra working partner. Mortgages can't be paid off in 20 years? Introduce 25 and then 30 year standard terms.

A huge portion of future disposable income already committed to a liability that exists in the present day, for something where most will buy and sell in the same market.

I'm afraid your assertion that "this is the way it used to be " is complete rubbish. 20 and 30yr mortgages were commonplace and 15 -20 were the norm. I agree that sometimes mortgages could be paid down faster but that was in the days of "reducing rate" mortgages - not the table rate ones now offered, and not all banks offered them.

I am afraid your comment is totally out of line (apart from confirming my point), you may not agree with us but your behavior defines you.

My comment reflects what "previous generations" experienced and is based on fact and personal situations. If it clashes with your assumptions then I guess that's somewhat unfortunate but you should expect correction when you're argument isn't based on fact

As a FHB I was surprised at the way banks were pushing 30 year terms. We have plenty of capacity to pay at a lower term but the mortgage manager kept pushing 30 years "just for the first year while you get settled in"....

If I were you I'd be looking for a new bank. The bank knows that once you get comfortable with the (relatively) lower payments it's very hard to increase payments and they have you trapped. If they won't play ball try to have a portion (say 20%) on floating so you can make extra principle payments as your finances allow - but read the fine print, some banks are quite restrictive on extra payments. Remember you're the buyer of their product and can take your business elsewhere in a blink, don't be afraid to remind them of that.

You are right but the bank had the best deal in terms of cash back and interest rates so I have stuck with them. I simply told them what the term and repayment amounts were and that I wasn't interested in discussing them. Extra repayments are capped at 10k p.a.

I worked in banking for many years so I know how the game is played, I'm more concerned about other FHB's that wouldn't understand the implications of banks pushing a of a longer term. Makes me wonder if mortgage managers and brokers are now incentivized to sell longer term lending.

I wouldn't be surprised if there's an incentive of some form to steer people to longer term mortgages. The fact extra payments are capped so low tells me banks are in no hurry to see mortgages paid back quickly - they know interest rates will rise eventually and want to maximise their returns. Hopefully brokers would be advising their clients accordingly but the line is very blurry when it comes to brokers and whose interest they are truly working for. Being a cynic I would say ultimately the banks

I think an element of it is banks/brokers playing caution at clients over estimating their ability to make additional repayments and setting an unrealistic loan term, that they'll want to soon increase after the loan is drawn. This creates more work for the bank/broker later down the track & can cost the clients.

A bait and switch. Get everyone juiced up on low interest rates, and then when the loan book size starts retreating ratchet up the rates. Start seeing table loans where the interest portion in dollar terms remains fairly static over the duration, every refinance sees a drop in the outstanding principal amount but a slight increase in the interest rate preserving the bottom line.

Once the average house price to income moves over 10 there is simply no room for prices to increase much more unless there is some serious wage inflation, which is very unlikely.


Adrian Orr: "Hold my beer..."

Take the ocr negative and there will be more to come.


Both the Government and RBNZ can and should do something about this, this complete lack of action is an outrage and shows who is really ru(i)nning this country.

Some international comparisons would be interesting here.

When the banks work out your debt to income level, do they use your before or after tax salaries?
Is there anyone out there who knows the answer to this with with 100 % certainty? Also, Do they treat all income equally for this calculation?

Surely, disposable income since IRD has first legal claim.

Disposable income is used to check for your serviceability of the mortgage. I went through this with the bank previously - i.e. how much flexibility did i have with my pre-conditional approval. She explained in a matter of fact way that they (the sales person, really) use the internal tools to asses based on your net income vs expense breakdown to see how much headroom there is. The credit team in the back office may sharpen the pencils a bit more but it is the same logic/algorithm, really.

DTI would be red flag #1, and disposable income red flag #2.

"The DTI ratio is calculated by dividing the total debt of a borrower by their gross income."

Slapheid you are correct; it is pre-taxable income including all income and not only wage and salary. Audaxes is incorrect.
Note also that debt is total debt and not just the loan. Included in debt is student loan, car and other loans, hire purchases, and any other loan or overdraft facility which includes the credit card limits (including those issued by other providers) although the actual balance(s) may be less/unutilised.
In NZ debt is assessed more rigorously than other countries such as the UK's LTI; so if international comparisons are made, as posted by Brisket, need to take this is into consideration.

I'm not so sure about pre-tax income printer8 - "Borrower gross income is the amount of income the reporting bank
is prepared to count as part of assessing whether to extend a loan to a prospective borrower." That quote is taken from the same article. At no point does the article mention pre-tax income so I think Audaxes is likely to be correct.

RBNZ article refers to “gross income” and talking to a mortgage broker (family connections) some time ago this was her comment as well; she also referred to any credit facility (including any overdraft facility and credit card limits) even though these may not be utilised.
Banks may consider disposal income when doing their own due diligence but as the RBNZ refers to it is gross income. Banks may consider disposal income (which they will be able to readily confirm from bank accounts) but will not consider student loan repayments nor liable parent deductions (some privacy issues there). However for RBNZ it takes gross income of which things like student loan will be considered as a debt.

printer8 the article refers to "gross income". At no point does it mention pre-tax income. As I said the explainer I copied was from further into the same article as slapheid's quote came from. The last time I applied for a mortgage the bank went off nett total income (post tax) as a starting point before costs (living expenses, credit cards, rent etc). Perhaps things have changed but I've had 4 mortgages so merely speaking from my own experience.

Hook, gross income is pre tax (and other deductions like ACC levy) income.

Why don't you read the RBNZ article. BTW how many mortgages have you applied for recently (if ever)?

Why don't you read it? If the RBNZ meant nett income, why wouldn't they just say that, rather than use the term gross income and redefine it to mean the same thing as nett income?

Yes, we have all read the RBNZ article: the article refers to "gross income" but despite both its both wide use and its wide understanding you seem determined to redefine this.
The commonly used terms in the context that we are discussing are:
- "gross income" (such as used by IRD) being income after legitimate expenses in obtaining that income but before tax (i.e. your income liable to tax),
- "net income" being after tax, and
- "disposable income" after tax and set expenses.
One's bank is most interested in your "disposable income" of which you talk about when applying their stress test and your ability to met the loan. It may be this is where you are confused.
Yes, financial statements will refer to "pre-tax" profits rather than "gross" profits.

P.S. You also seem to be besotted counting the number of mortgages as a necessary authority or knowledge. You say you have four which is considerably less than me (probably around at least 15 to 18 at least, but who is counting?) so on your criteria it would seem I gazump your paltry four. :)

Thanks for the correction - I never had a mortgage in NZ, so I was guessing out of a prudence preference when it comes to leveraged speculation.

Looks like another first class problem.

Yes sad to see numbers of high DTI; but pleasing to see most number of FHB mortgages for any month since data first published in August 2014.
Number of FHB mortgages September 2020: 30223 compared to September 2014: 1462.
While number of FHB for September 2020 was about double that for September 2014, the numbers of owner-occupied (17,811) and investors (4419) were remarkably similar.

I really hope it wasn't Adrian Orr who said 'House prices will double every 10 years'

Again, DTI is a rubbish metric that confuses people. Income needs to be compared to Expenses not Debt. The Debt is already captured in the LVR (where "L"oan is actually "D"ebt).
If we correctly compare Income to Expenses, it becomes very simple to understand why DTI goes up when interest rates (= the missing Expense factor) reduce, because you can borrow more for the same costs of servicing your mortgage.
Arbitrarily saying a DTI of 5 is maximum is nonsense. Here's an example why: Joe earns $100 pa and has a mortgage of $500k so he has a DTI of 5 in all of the following examples:
If Joe pays 4% interest on his $500k Debt it costs him $20k pa (+ principal), he's probably fine.
If the interest rate is 8% he'll pay $40k pa (+ principal) he could struggle
If the interest rate is 12% he'll pay $60k pa (+ principal) he will be in trouble
If the interest rate is 2% he'll pay $10k pa (+ principal), no problem at all
What if the interest rate is 0% he'll pay $0k pa (+ principal) ?

You are talking affordability. And as your comment shows, if interest rates swing around, that will change drastically.

No matter how you paint it, it you borrow a million buckys, you have to pay the piper sooner or later. If you are earning 200k, its probably not to bad, at sub 100k it is life bank enslavement, like murder, but 17 years longer. Keep smiling.

but what if everyone borrows a million bucks, including the government decision makers, and you're the only one with 200K cash in the bank?

No Chance, I bought a boat.

What if the plan is to NEVER pay it back?
Pay interest only and have house price inflation outstrip the carrying costs i.e. bank on capital gains

History shows that house prices go up because governments constantly print money devaluing currencies
Which means that in dollar terms capital gains over the long term are almost guaranteed

Looking at DTI's in isolation is ridiculous.
The last time the DTI's were 3 interest rates were 18%.
DTI's at 5 or more with interest rates at 2.5% are affordable.
Banks are still doing mortgage stress tests at 5-6 % to get a loan.
Be happy FHB's are able to secure a property.
We have 2 offspring who are delighted to have secured their first homes , the one in Auckland is costing less per week than renting.
Interest rates are going to be low or lower for years.
To much pessimism on this site.

Agreed; current interest rates have improved affordability and - as commented above - it is not surprising the number of FHB are up.
Although affordable at low interest rates it is with large loans; to be prudent they need to be paying that mortgage principal down as much and as quickly as possible.

More importantly, to be prudent they shouldn't be taking on debt they couldn't comfortably continue to pay off if interest rates get quite a bit higher.

Banks are currently applying a stress test of 5 to 6% mortgage rate so that should give some comfort to FHB regarding affordability and debt in terms of future mortgage interest rates.
As to being prudent it is not only about interest rates; I see personal unexpected shocks such as loss of one income, reduced hours or restructuring, employer insolvency, personal long-term sickness or accident, unexpected house repair cost, car expenses . . . . as being particularly important risk considerations and need to be prudent.
From my experience over the past 50 years most FHB will have been daunted by the level of debt and had a degree of being uncomfortable. I have also noted that many FHB in the euphoria of home ownership tend to spend on things like a new deck or alterations - here they need to be prudent by holding off and paying down the mortgage.

P8, I agree with almost all of that, except- in my experience, FHB should not treat the banks willingness to lend a certain amount as confirmation that they can afford that amount of debt should mortgage rates rise. They need to do their own calculations.

Personally, its great being at a stage in life where one is retired, comfortable, no longer having a mortgage and to have a secure investment income.
However, I do feel for the difficulties of young FHB.

Yes, at the current rate of mortgage payment, my wife and I will debt free just close to superannuation age (65 yrs). Hopefully we can shave few more years of our loan term by increasing our payments once the 2 kids have flown away from our nest. But yes, its getting more and more tough for the FHBs.

The guy doesn't give a stuff, you'll get a better answer talking to a brick wall.

Is the "I" portion of DTI household income? I.e. when a couple apply for a home loan it's their combined income?