16 Jun 2021

Debt-to-income ratios will have 'limited' impact on first home buyers - RBNZ

4:35 pm on 16 June 2021

The Reserve Bank is to get another weapon to combat a hot housing market and the threat it may pose to the financial system.

Governor of the Reserve Bank Adrian Orr.

Reserve Bank Governor Adrian Orr. Photo: RNZ / Dom Thomas

The government has given in-principle approval to add debt-to-income ratios (DTIs) to other measures to ensure financial stability and help move house prices to a sustainable level.

The RBNZ has wanted the ability to use DTIs for several years and was directed to send a detailed proposal to Finance Minister Grant Robertson earlier this year, when he changed the central bank's riding instructions requiring it to have regard to the housing market when it set monetary policy.

"Our analysis detailed that debt serviceability restrictions, such as a Debt-to-Income limits, 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 RBNZ said.

Robertson, however, imposed a condition that any scheme should be "designed to avoid impact, as much as possible, to first home buyers".

"The analysis also demonstrated that any such restrictions would impact investors most powerfully while having limited impact on first home buyers," the RBNZ said.

It said it regarded DTIs as complementary to the current loan to value ratios (LVRs) which limit the amount of low-deposit lending banks can do.

Governor Adrian Orr repeated the RBNZ policy stance, that its policy aim was not to counter rising house prices but ensure the financial health of lenders. However, he said measures such as DTIs and LVRs would help to hold house prices around "sustainable" levels.

"We believe that a 'sustainable house price' is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates."

DTIs are a measure of debt serviceability, requiring lending to be matched to the income of the borrower. For example if the DTI was set at five, a person with an annual income of $100,000 would be limited to $500,000 of borrowing for a property.

Recent figures from the RBNZ showed nearly 14 percent of lending in March was at a DTI of six or more.

The RBNZ said it would now design the DTI scheme after consulting with the property sector and the public on implementation before getting final government approval.

A property economist said it was possible DTIs would never be used.

"There's no doubt they would bite, but by the time they're ready, there's every chance the market will have slowed of its own accord and the Reserve Bank won't need them," CoreLogic senior economist Kelvin Davidson said.

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