The Reserve Bank of New Zealand is to get a new tool it can reach for in its macroprudential toolbox to tackle the country’s raging housing market, with Finance Minister Grant Robertson agreeing that the bank’s Memorandum of Understanding can be updated to include debt serviceability restrictions.
Following February’s direction to the RBNZ to consider house price sustainability when making financial stability decisions, the Finance Minister requested the bank provide analysis on DTI ratios as well as interest-only mortgages.
The RBNZ says its analysis showed “debt serviceability restrictions, such as a Debt-to-Income (DTI) limit, are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability.
“The analysis also demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first home buyers.”
The RBNZ has wanted the ability to deploy DTIs for several years and now Robertson has agreed, in principle, with the condition that any scheme be “designed to avoid impact, as much as possible, on first home buyers”.
Nearly 14 percent of New Zealand bank lending in March was at a DTI of six or more. However, this was skewed by higher debt to income ratios in investor borrowing. Less than 7 per cent of first home buyers had a DTI over seven, compared with just over 33 per cent of investors.
The RBNZ believes a DTI limit would “reduce credit growth during an upswing and reduce the risk of a significant rise in mortgage defaults during a subsequent severe economic downturn”.
In its memo to the Finance Minister, the RBNZ said its analysis suggested that, “in the current market, a DTI cap of seven would have minimal impacts on first-home buyers while deterring some purchases by investors.”
“A lower DTI cap of six would be expected to have more impact on moderating house prices and dampening investor demand but would also have higher allocative efficiency costs and could prevent a small number of first-home buyers from entering the market,” it said.
“Another option would be to differentiate the caps by borrower group, as is the case with the existing LVR restrictions. For example, the DTI cap could be set at seven for owner-occupiers and six for investors. DTI caps could also be combined with a speed limit(which could be differentiated by borrower group), allowing banks to allocate credit to those they judge as better high-DTI borrowers.”
The RBNZ will now design the DTI scheme in consultation with the property sector and the public, before getting final government approval. Even then, there is no guarantee DTIs will be pulled out of the toolbox.