The Reserve Bank has released a consultation paper on the use of Debt to Income (DTI) ratios to restrict mortgage lending, saying it would not use DTIs in the current market conditions but that they could be a good option in the future.
It wants DTIs, which limit the amount people can borrow to a multiple of their income, added to its macroprudential toolkit alongside loan-to-value (LVR) restrictions. The Bank is suggesting limiting loans to no bigger than five times a borrower’s income.
Property investors were most likely to have borrowed more compared to their income and if DTI restrictions were deployed, they could stop 9000 investors a year purchasing properties.
The size of New Zealand mortgages compared to incomes has increased sharply over the past 30 years and data from the five biggest banks shows nearly 60 per cent of Auckland lending now involves a DTI ratio of more than five.
The Reserve Bank wants feedback on the risk posed by high-DTI lending and the potential for a limit to offset that, alternative options and desirable design features for any DTI policy.
Finance Minister Steven Joyce welcomed the Bank’s call for feedback, saying the use of DTI restrictions would be a significant intervention in the housing market, so it was important that all interested parties had their say during the consultation period.
The Bank said the exact nature of any limit applied would depend on the circumstances and further policy development but it would prefer a speed limit approach with banks able to lend perhaps 20 per cent of their loans to high-DTI borrowers compared to the current cap of 45 per cent nationwide.
First-home buyers wanting to buy relatively low-priced or newly built houses could be allowed to buy houses below the current HomeStart price caps of $600,000 in Auckland and $400,000 to $500,000 elsewhere without damaging the efficacy of the policy, the bank said.
On June 22 the Reserve Bank left the Official Cash Rate (OCR) unchanged at 1.75%. It said house price inflation had moderated further, especially in Auckland, which partly reflected loan-to-value ratio restrictions and tighter lending conditions. "This moderation is projected to continue, although there is a risk of resurgence given the ongoing imbalance between supply and demand."
