Debt to income limits likely in NZ
Momentum is picking up to widen macroprudential measures in New Zealand. The Reserve Bank of New Zealand yesterday said it would soon publish a consultation paper "on a potential tool for limiting the proportion of bank mortgage lending at high debt to income ratios."The RBNZ said it "believes that DTI limits would be a useful additional macro-prudential tool. "A DTI limit could reduce potential risks to financial stability stemming from rising household mortgage debt, should those risks become sufficiently acute."The consultation paper, the RBNZ said, "outlines the potential role for DTI limits alongside the current set of macro-prudential tools and includes a cost-benefit analysis for using DTI limits during a hypothetical period of rising house prices and high and concentrated household debt. Analysis suggests there would be a considerable net benefit from using a DTI limit in such a scenario."The Reserve Bank said it conducted "a simple stress test of current owner-occupier borrowers to an increase in mortgage rates to seven per cent and nine per cent. An interest rate of seven per cent is close to the average two-year mortgage rate over the past decade, whereas nine per cent provides a more extreme but still plausible scenario. "Many borrowers are estimated to be vulnerable to higher mortgage rates (figure A2). It is estimated that around four per cent of all borrowers, representing six per cent of the overall stock of mortgage debt, and five per cent of recent borrowers, representing nine per cent of recent mortgage debt, could not meet their essential expenses ('severe stress') if mortgage rates were seven per cent. "A further two per cent of all borrowers and seven per cent of recent borrowers would only have a small buffer for discretionary spending after meeting their mortgage payments and essential expenses ('mild stress'). "Overall, this analysis suggests that a significant proportion of New Zealand borrowers are vulnerable to a material increase in mortgage rates. A sharp and unexpected rise in mortgage rates could see the most vulnerable households default, sell their houses or reduce consumption to repay debt."The RBNZ explained that recent clamps on maximum loan to valuation ratios "are assessed to have improved bank resilience by helping to reduce the share of new lending at high debt-to-income ratios in the past six months".