The Reserve Bank is proposing to introduce debt-to-income (DTI) ratio restrictions on banks' home lending, and loosen loan-to-value ratio (LVR) restrictions on their low equity mortgage lending.
DTI restrictions limit the amount of debt borrowers can take on relative to their income.
In a new consultation paper the Reserve Bank says it's proposing initially setting the DTI policy to allow banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than six; and
- 20% of their residential loans to investors with a DTI greater than seven.
It's proposing easing the LVR settings at the same time as activating DTIs allowing:
- 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
- 5% of investor lending to borrowers with an LVR greater than 70%.
Current LVR limits set a 'speed limit' on how much new low-deposit lending banks can do. At the moment the Reserve Bank policy classifies investor loans as high-LVR if they are more than 65% of the property’s value, and restricts high-LVR lending to no more than 5% of a bank’s total new investor lending. Owner occupier loans are deemed high-LVR if they are more than 80% of the property’s value, with banks' high-LVR lending restricted to no more than 15% of a bank’s total new owner occupier lending.
DTI proposals 'would not bind currently'
The Reserve Bank says in October last year lending above its proposed DTI thresholds was 10% for owner-occupiers and 8% for investors. It says its proposed 20% speed limit "would not bind currently but would constrain lending in a scenario similar to the 2021 house price boom."
This, the Reserve Bank says, reflects its "approach of calibrating DTI restrictions, so they act as guardrails – in which they are binding during booms but minimally binding during other times."
"We also considered a single threshold for all borrowers (i.e., one setting for owner-occupiers and investors) which would be simpler. However, we were not comfortable this sufficiently addressed the differences in borrower types such as that investors tend to borrow at higher DTI ratios than owner-occupiers. This means that a single threshold that would be binding during a house price boom for investors may not be binding at any time for owner-occupiers, while imposing higher efficiency costs on investors. Therefore, we considered this option did not meet our policy goal of applying DTI restrictions to all borrowers," the Reserve Bank says.
Subject to feedback to its consultation, the Reserve Bank says it will activate DTI restrictions in mid-2024. However, as noted above they'd likely not restrict lending initially.
"Activating DTI restrictions at this time, rather than waiting until we see a build-up in risky lending, means that they are more likely to be in place when they are needed given that it takes time to activate the DTI restrictions. We expect, following activation, DTI restrictions to be binding when financial stability risks are elevated, but minimally binding at other times."
"By activating the DTI restriction, we aim to improve financial stability by a. reducing the probability of a systemic wave of mortgage defaults (or financial stress) and, b. reducing housing market cyclicality, while also minimising the efficiency costs of restraining lending to otherwise creditworthy borrowers," the Reserve Bank says.
"Estimating the exact impact of DTI restrictions on house prices is difficult, particularly given that DTI restrictions have not yet been used in New Zealand. Our previous experience with LVR restrictions shows that they have a relatively small impact on house price growth. As such, we expect that the proposed loosening of LVR restrictions will only impact house prices at the margin."
The Reserve Bank goes on to say it doesn't expect its proposed DTI restrictions to have a significant impact on house prices in the short-term, given the calibration wouldn't be binding given current market conditions and flows of high-DTI lending are low and expected to remain below the proposed speed limit in the near term.
"Our view is that DTI restrictions can help to support sustainable house prices at the margins in the medium- to long-term by preventing house prices reaching unsustainably high levels in booms."
The Reserve Bank's current assessment is house prices "are within the range we estimate to be sustainable, with a lower risk of a house price correction than in recent years."
Risks of boom & bust credit cycles 'significant'
In a statement Reserve Bank Deputy Governor Christian Hawkesby says the financial stability risks of boom and bust credit cycles are significant, so it’s important to have appropriate policies in place to manage them.
"DTI restrictions, which set limits on the amount of debt borrowers can take on relative to their income, will complement other tools we use to support financial stability, including LVR restrictions on residential mortgage lending," Hawkesby says.
"While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting. We believe introducing DTI restrictions will reduce financial stability risks, support house price sustainability, and fill a gap that is not covered by existing policies."
"Introducing DTI restrictions will also allow us to loosen LVR settings without increasing risks to financial stability. Working together, these tools enable us to more efficiently target financial stability risks," says Hawkesby.
DTI of five previously viewed as 'pretty high'
The Reserve Bank says its modelling suggests when interest rates are high financial stress begins to be felt at DTI ratios of six and seven. That's higher than in 2017 when the then-Reserve Bank Deputy Governor Grant Spencer said a DTI ratio above five was "pretty high."
"We think if we get up over five that's pretty high. And it tends to be the area where potential stresses are going to emerge if there's a shock to interest rates or incomes," Spencer said in 2017.
However, in 2021 the Reserve Bank said a continued decline in interest rates meant almost 60% of new lending was taking place at a DTI above five, with about a third at DTIs above six.
"We do not consider it appropriate to calibrate DTI restrictions in a way that would capture a very large share of lending at current levels. This could create a shock for the housing market and the potential for unintended adverse outcomes, e.g. disintermediation," the Reserve Bank said in 2021.
Potential of banks losing business to non-bank lenders played down
Meanwhile, the Reserve Bank says it's aware the more macro-prudential restrictions, such as DTIs and LVRs that are placed on banks, the greater the chance of disintermediation - or loss of customers - to non-bank lenders.
"However, the risk is reduced by the easing of LVR restrictions and the non-binding level of the proposed DTI calibration. Therefore, large scale disintermediation is unlikely during most of the credit cycle but may be more likely at the peak of the credit cycle when DTI restrictions become more binding."
"Non-bank lenders are currently a very small share of the residential mortgage lending market. We do not foresee DTI restrictions causing disintermediation of the scale necessary to be a concern. However, we will monitor this and can move to address disintermediation if it occurs. Additionally, we will consider how macroprudential policy operate across all types of deposit takers as part of the upcoming DTA standards consultation," the Reserve Bank says.
A long time coming
The Reserve Bank has wanted to have the option of using a DTI tool since at least 2016 but struggled to secure government support from firstly the National-led government and then the Labour government due to concerns about the potential impact on first home buyers. It finally gained support from the then-Finance Minister Grant Robertson in June 2021.
Introduction of the tool has also been opposed by banks, with bank lobby group the New Zealand Banking Association maintaining "there's a real risk of adverse customer impact" if the Reserve Bank introduces a DTI tool.
In a consultation paper in November 2021, the Reserve Bank assessed the impacts of introducing a DTI cap for borrowers of six or seven times gross income and a test interest rate floor for bank lenders of 7% or 8%, but stressed these were merely illustrative models. It also talked down the potential impact of DTIs on first home buyers.
In its new consultation paper, the Reserve Bank says currently about 10% of first-home buyer lending is above a DTI of six. This is similar for owner-occupiers, without investment collateral, which will be included in the owner-occupier group along with first-home buyers for the purposes of the DTI restriction.
"Therefore, the proposed DTI calibration for owner-occupiers would not be binding given current conditions in January 2024," the Reserve Bank says.
*The chart above comes from the Reserve Bank.
International comparison; Reserve Bank proposals not 'unnecessarily restrictive relative to international benchmarks'
The Reserve Bank's consultation paper also includes an international comparison, via the table below. It says this suggests its proposals aren't "unnecessarily restrictive relative to international benchmarks."
The regulator highlights "numerous factors" contributing to the differences in DTI restrictions across different countries. These include differences in how central banks define debt and income. For example the Reserve Bank says Ireland uses a loan-to-income (LTI) tool that only accounts for a single mortgage loan and excludes other types of debt. The Reserve Bank uses a household’s total debt in NZ.
"Our existing LVR policies are slightly different to some comparator countries. Therefore, given the interactions between DTI and LVR restrictions, it is reasonable to design the DTI restriction slightly differently than in other jurisdictions, the Reserve Bank says.
"New Zealand’s housing market is different to many comparator countries. Borrowers will traditionally borrow at higher DTI ratios than comparable jurisdictions, suggesting that a looser calibration relative to other countries would be consistent with a strategy of only being binding in house price booms," the Reserve Bank says.
"In addition, the role of investors in New Zealand is different than in many other countries – with fewer institutional investors and more small scale household investors."
The Reserve Bank notes the table below focuses on countries with a DTI tool, but says a Debt-Servicing-to-Income (DSTI) restriction is more common internationally than the DTI.
Although DSTI restrictions operate in a similar way to DTI restrictions, a DSTI is a limit on how much debt a borrower can take on beyond a given share of their income that can be used to service debts and not a ratio of indebtedness to income like DTI restrictions.
"For example, a DSTI of 40% would mean a maximum of 40% of a borrower’s qualifying income can be used to service qualifying debt. In November 2021, the Reserve Bank consulted on the potential implementation of different debt serviceability restrictions, including a DSTI tool. We considered the DSTI to be too complex to implement and administer in New Zealand’s context."
It notes Australia doesn't have a DTI restriction but banks there must use a test interest rate tool when testing borrower affordability.
"Again, we considered the viability of a similar test interest rate tool in the November 2021 consultation, and we deemed the DTI tool to better support our financial stability objectives while also minimising efficiency costs," the Reserve Bank says.
NZ banks set the interest rates they use to test borrowers' ability to repay their loans themselves.
Decisions due in late June
The Reserve Bank is consulting on the proposed settings for DTIs, as well as proposed easing of LVRs. Consultation will close on March 12. Hawkesby says the Reserve Bank will then consider feedback and "decide on the activation and initial settings of the DTI tool." It expects to communicate decisions by the end of June.
If it decides to activate DTI restrictions, the Reserve Bank says it'll seek feedback from banks on changes to their conditions of banking registration before activating the policy.
"We intend to review DTI and LVR restrictions settings after 12 months if we activate DTI restrictions. Beyond that, we intend to review macroprudential settings every 12 months, although we will review them more frequently if circumstances warrant it," the Reserve Bank says.
It has previously given banks 12 months to prepare their systems for the possible activation of DTI restrictions.
156 Comments
DTIs of 6 or 7 are crazy in comparison to what is the norm in OECD countries. If you do the maths it seems it won't have any impact in NZ.
[EDIT]
Debt-to-Income (DTI) Ratio: What's Good and How To Calculate It (investopedia.com)
with no more than 28% of that debt going towards servicing a mortgage or rent payment
As a reminder, in 2022 in NZ households funnelled an average 53% of their incomes into the mortgage, almost twice what is considered reasonable.
That's probably right, but once this system is actually operational it can have the metric "changed" without changing the whole system to bring it more in line with the the likes of the UK (3x). So a step in the right direction. Also FHBers and investors could have different settings limiting speculators abilities to farm excessive debt.
I'm afraid it will never go down to 3. "We" let prices go out of control, DTIs should have been implemented decades ago like in any other country, at a reasonable level (between 3 and 4). We're now past the point of non return IMO, incomes aren't magically going to double/triple overnight neither will house prices be halved. Or maybe they will in 30 years when/if we reach peak population and we're left with plenty of empty houses, given they're decent enough to be lived in.
Just feel for the recent FHBs... they've been screwed by RBNZ and their recklessness causing the price to skyrocket, and now to overcompensate for losing all credibility from various screwups they are going all out the other way, wiping out FHBs' deposit, pushing them into negative equity and they won't be able to refinance due to DTI... lol the funny thing is there is absolutely no accountability in RBNZ for this sh*t show and ruining young families while Orr is fully shielded and collecting over $850k from NZers
FHB and others need to learn they are responsible for the outcomes of their decisions. Most economically minded adults not associated with Banks or Real Estate would have counselled against buying in the boom... or the FHB could have done their own risk analysis (and yes their investment decsion and risk management is their responsibility not the RBNZ/Media/RE/Govt etc)
Terrible argument. You can only not buy a house for so long, if you want to raise a family etc. FHBs generally have to bite the bullet at some point or they are over 35 and out of child rearing age. Currently the average age for 1st house purchase in NZ is something like 36, so right near the end for most.
I always find it funny that often older people really really want grandkids, but the young can't afford to have a house to raise them and get blamed somehow for this. The young who do finally are just able to afford a house then get told they did the wrong thing for buying in a boom. When its been a boom for 15 years...its normal, not a boom. Also those same older people also scream about migration... when its the only thing keeping afloat their current lifestyles.
NZ is a housing market, driven by external migration, with an economy tacked on. If you don't like that, vote accordingly.
Such a comment could only come from someone who has never experienced NZs housing insecurity and unaffordability currently smashing the younger generation. To suggest that a young person who wants to have a family (a fairly basic human right) is suffering from some sort of delusional envy and is undeserving of having housing security with which to raise a family, is pretty abhorrent.
Unless you have access to the bank of mum and dad who are also willing to help, almost all young people these days are very unlikely to own a house. Unless something drastically changes, which looks unlikely given the revolving door politics of the 2 main parties to not change the status quo, or keep enriching land owners/specuvestors.
We live in a capitalist increasingly global society. Teaching kids they have a right to anything without hard work .... will simply lead to disappointment and suffering. Teaching them to be personally accountable and work hard for what they want is the only way
They have to compete with the kid from china india and nz for their right to a house or fanily.
If a young person wants a house and to raise a family my advice is to work hard at school, learn how the world will likely look in 5,10, 20 years choose a good career, work hard, be willing to relocate as needed and adapt as the world changes. Or kids or businesses who do so here or overseas will take the houses unstead
I am older, have a degree, have worked hard, changed career, run my own business, get up early and keep fit, have kids, have owned houses etc. I know next gen kids who are happily doing the same... i find it kind of hilarious when people who dont work hard, live where they grew up, didnt study hard, buy houses at the peak - then start whinging that they are broke or those that cant even afford a house whine about the prices .
I agree housee are over priced but ultimately we have the choice to try to change the system or work hard inside it.
Millennial home owner here, you make some valid points but "just do it" is a cop out.
I myself also work hard, moved away from my family to the North Island (our 6 y/o sees family once every 2 years). I'm successful in my career, employer allows me to WFH, so yes hard work can result in great outcomes but that also comes with luck and opportunity.
I don't for a minute pretend every hard working young person can move to a small town, get a 6 figure remote work job and buy a house, and this shouldn't be the substitute for what was once the norm because politicians are too lazy to fix our housing market.
"because politicians are too lazy to fix our housing market. "
The previous government attempted to address the issue of housing affordability - they changed the policy settings to:
1) encourage building of new residential dwellings
2) encourage renting for social housing
3) equalise the policy settings between owner occupier buyers and non owner occupier buyers.
These were politically unpopular with certain groups with vested financial self interests.
Had these settings been able to continue for a longer period, this may have had a bigger impact on affordability of owner occupier buyers in the residential real estate market.
You are missing the point. Most young people these days will do all the things you state, get educated, work hard etc and still not be able to afford a house. Just because you know some people that can, doesn't mean they all can, in fact the numbers who are able to do it are getting smaller and smaller. Quite simply, those things resulted in better outcomes for owning a house previously than they do now as borne out by almost every statistic.
Strawmen arguments like " i find it kind of hilarious when people who dont work hard, live where they grew up, didnt study hard, buy houses at the peak - then start whinging that they are broke or those that cant even afford a house whine about the prices" are stupid, frankly nobody who wasn't quite wealthy already and with good incomes could have ever bought at the peak without seriously lying about their financial situation. Banks simply wouldn't have let them.
It is if people are using the house to borrow against when starting a business etc. It will also badly affect those first home buyers or people that upgraded in the last 3 years. I still remember the PM saying a few years ago that no one wanted to see house prices fall which some reporters took to mean that the government would not do anything to allow house prices to fall. IMO the damage was done between 2020-2022 when the RB printed billions and dropped interest rates to emergency low levels and allowed the FLP to remain in place until last year.
Make sure that you are comparing apples with apples when discussing a DTI ratio compared to the likes of 3 in the UK.
My understanding is that in the UK a DTI of 3 refers only to the specific value of the mortgage.
However, the RBNZ definition of DTI ratio includes all debts and pre-existing facilities to all lenders; which may include the mortgage loan, as well as outstanding hp, any overdraft facility plus one’s credit card limit (even though these may not actually be fully used), car loan, and may include one’s student loan . . . and possibly a loan from bank of M&D. NZ banks tend to currently consider all of these when granting a mortgage.
However, yes; a DTI ratio of 8 is high.
Providing emergency accommodation is a perfect example of taking charge instead of blaming the situation. When Jacinda closed the borders, then locked us down, we had 0 guests. So I got busy finding a way to survive, emergency accommodation was the answer. Today, we still have 25-30 % of WINZ guests (in a separate building to regular guests)
No better example of this than property being turned into a welfare scheme instead of being allowed to fall, either. You're right the economic mess has been caused by this entitlement mentality to getting free money and to being protected from risk.
Happening again with buyouts of flood affected properties.
All that help, only to be followed by victim mentality in speculators mewing about "restoring the dignity of landlords". Bizarre.
Well said Rick! We're certainly not getting "free money for doing nothing", we work hard to look after people! People on benefits (paid by our taxes) buy food at supermarkets. This doesn't make supermarkets "bad" because they provide food to beneficiaries, just as we provide accommodation to beneficiaries.
Yes, the ~$12 billion of taxpayer handouts via RBNZ stimulus for property was quite another matter, as was the Southern Response taxpayer handouts to poorly insured property owners, as are the $778 million in buyouts of wet property.
Obviously the constraining of supply via zoning, and the subsidising of rents and prices via welfare handouts and ramraiding younger generations' retirement scheme also ultimately benefits property and speculators, especially those born at the right time to have also received affordable housing from previous generations' tax contributions.
Quite the coddling, yet still there's victim mentality exhibited at any attempts to allow more freedom and responsibility. Too much coddling for society and the economy's ultimate good.
Looking at the current DTI stats it would have very little impact. Look back at Sept 21 and it would have been somewhat useful, but I do agree the limits are too high and/or the 20% buffer too large.
https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/residen…
The bizarre thing in the consultation paper is they seem to be proposing no haircut to rental income, so presumably no account for the obvious expenses that are related to that rental income (rates, interest, insurance, maintenance). Unless I'm reading this wrong, you can go to your bank with a proposed rental purchase that will lose you money every year, and present this as an increase in your income for DTI purposes...
edit: ignore my link above - the data is better presented in the consultation paper
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations…
If I'm reading the same page - it looks like they're referring to the way in which they have been collecting data on DTIs. They've historically collected data based on rental income with a 'haircut', however the full rental income will be considered moving forward.
Yes - from memory the banks were unofficially discounting rental income by something like 50% to account for the obvious related expenses? Could be wrong on the number, and not sure what the RBNZ were doing previously.
Crazy decision that together with the higher DTI limit is hugely favoring investors. It's like me borrowing 500k on my residential mortgage, sticking it in a term deposit and claiming this extra income to allow more lending without having to account for the associated (larger) expense.
Why should they account for rental expenses off rental income when they dont account for household expenses off personal income? They don't subtract costs like rates, insurance, maintenance (also incurred on owner occupier homes), or unable to be avoided costs like school fees, healthcare, food, transport from your personal income.
In many cases these days, buying a rental is a cashflow negative proposal, especially when you account for long term maintenance. Why would the bank offer to lend you more on the basis of lower net income?
Any homeowner spending more than they earn will quickly be shown the door by the bank.
It would have made a difference in 2020/2021, and would have probably reduced the excessive house price rises of that time.
If you download the spreadsheet from that page to see older data, more than 30% of investor lending was borrowed with a DTI>7 from Aug 2020 to Feb 2022, peaking at 42% in Jan 2021
In fact before June 2022 every month except 1 since the series began in Oct 2018 had lending to investors at a DTI>7 of more than 20%
Agreed.
But let's not forget the old saying, "perfection is the enemy of progress".
Get the damn DTIs in ... And tweak the settings as the years go by.
(Banks absolutely hate DTIs. Anything that constrains house prices is not in their interests. They love the wild west market we have at the moment. Are DTIs a done deal? Maybe. Maybe not. It depends on what Prince John has suggested Luxon must do. I'm leaning towards them being canned at the last minute.)
It is though. Look at any comparative country with a constraining DTI and rents are higher. Im not necessarily against DTI's but any constraint on financing will put a constraint on supply. And rent is determined by supply and demand.
The same with interest deductibility. When you place an expense on a supplier that cost is past on to the consumer. That is why prices went up when GST was introduced.
And rent is determined by supply and demand.
And demand in NZ is artificially boosted by skewed markets shutting people who want to buy homes out of the market to buy, and increasing the demand for rent. If there was more home ownership there'd be less demand for renting.
If they introduced a DTI that slowly fell, lets say to 5. Land would become cheaper overtime and people wouldn't be taking on so much debt with lower deposit requirements. So this would make it easier for people to buy homes. Many more people would be able to afford to build which is increasing supply of housing.
That seems to be circular reasoning to me (or am I misunderstanding you?). House prices will come down because peoples ability to finance them will be contrained, therefore more people will be able to buy houses...
You are relying on DTIs having a stronger negative effect on others than yourself for it to be a net benefit to you. Cruelly, if DTI's benefit anyone it is those who already have high incomes.
If DTI constrain everyone so that houses are cheaper then the required deposits are less too which makes it easier to buy or build (parents not required to help so much).
Also debt payments will become lower proportion of income so mortgage stress would be less of a problem should interest rates rise or other unforeseen circumstances.
Some could afford to then have more kids, others might invest the extra money into productive businesses. Sounds like a much better existence to me than what we have now.
High income people with continue to compete for the better houses but with less credit. I don't see them benefiting more than others like you say.
I saw your post below and those cities you compare with are much larger more exciting international cities where people earn a lot more than in Auckland so of course there rents will be higher. It has nothing to do with DTIs.
Rent is determined by the ability of the population to pay it and landlords are squeezing them for the maximum that they can get. So adding a cost to the investors can't be just passed onto the tenants. If they can't get the same yield then house prices should correct down until they can get the same yield.
And about GST. Prices went up when GST was added because: GST was added.
That isn't quite correct. The median household income in Auckland is 152k p.a (NZD). That is higher than London (72k), Boston (133k), Singapore (131k), and Australia (131k). I do not see that it is tenant incomes alone that influence the rental price index. Plenty of places with lower incomes have higher rents than Auckland.
The idea that the sample I have selected are more exciting places than Auckland is subjective.
My example of GST is to demonstrate that costs on suppliers (e.g. DTI) are passed on to the consumers. You seem to agree. If it is true for avocados why would it not be true for houses?
If developers cant access funds from the standard bank institutions because of a DTI two things can happen. One, the developers will need to go to secondary lenders who charge higher interest rates (I was recently quoted 12.5% by Liberty finance for example). Two, some developers will opt out, further constraining the house supply. In both cases it is upwards pressure on rents.
DTI policy to allow banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6; and
- 20% of their residential loans to investors with a DTI greater than 7.
It's proposing easing the LVR settings at the same time as activating DTIs allowing:
- 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
- 5% of investor lending to borrowers with an LVR greater than 70%.
How does this compare with the current lending profiles of the big 5? Would need to see the difference in what is being proposed to what the current percentage is of DTI 6+ and the LVR stats also to gain more meaningful insights as to the effectiveness and impact of the proposed changes.
Risk to whom? Not the banks. The banks can simply sell up all the properties they have security over, including the owner occupied main home. The owner occupier with a single property that is in negative equity is far more of a risk to the bank than a investor with multiple properties in positive equity.
I guess you never read my comment, but I said "assuming the same level of equity". If everyone's in positive equity and the market is liquid enough that they can sell, then sure, the banks are fine. However, the effects of an investor being forced to sell 2+ properties will drive the market down more than an owner occupier selling one.
Yes I did, perhaps I was not clear. In a situation where both the owner occupier and investor own a property that is in the same negative equity position and neither of them can cover the mortgage so the bank takes possession in a mortgagee sale, while the owner occupier has no other security to offer the bank, the investor has other properties that are in positive equity that can be sold as well, then that investor is far less risk than the single property owner occupier. So both sell the like for like property in negative equity, but the bank recovers the difference from the investor via the sale of something else, while they have to wear the loss from the owner occupier (assuming the owner occupier then goes bankrupt to clear the debt). Since investors have to have 35% equity in the property while an owner occupier only has to have 20% (or less if a FHB) then the owner occupier is also the one most likely to be in negative equity in the first place, so again, more risk.
7house luxon and his merry band of property investing MPs were never going to change the rules in favour of renters or home owners lol... their interest is quite the opposite.
i predict the rules will be ammended in favor of very wealthy landlords vs homeowners..
we get what we voted for
There will be two classes of citizen, these who inherit wealth and those who are perpetual renters eking out an existance.
I find this profoundly sad, I am all for a free-market and letting lenders assess risk. If someone wants to leverage to get ahead, then let them.
I read an article in the SMH recently where the proportion of buyers in the Eastern Suburbs under 35 getting help from parents was >50%, mostly between $200k and $500k but often outright purchase.
Hence my point, wealth inequality will continue to widen and will be either tolerated or unnoticed by Nat/Act/NZF voters as long as we don't open One News with kia ora.
Lesson learned: have a savings plan for your kids from a young age to build savings that grow over time for them in the case that they need it and you are still willing to give it at the appropriate age or situation. The system is stuffed, but whether it is fair or not, everyone wants their kids to have a better life than they did, and the world kids grow up in now is vastly different than the world one's parents grew up in.
So they're proposing the softly softly approach to avoid a boom in circumstance the like of which we may never see again. Well done. I think a lot of people on this site would prefer the settings were lower than that. I certainly would prefer the investor DTI was 6 not 7 as proposed - different settings for homeowners vs investors would distort the market even more than it is already.
I'd encourage all readers to submit, especially relating to distorting the market.
The DTI being higher for investors might allow first home buyers to borrow more for a 'investment property', and then move into it later.. ! The market stability is less affected by owner occupiers, and more my investor activity. An owner occupier will hang on and keep paying the mortgage for a roof over their heads, and investor is more likely to cash up.
There is a lot more detail in the link below if anyone wants a deeper dive
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations…
Owner-occupiers and investors represent different risks to financial stability. If their financial situation deteriorates, owner-occupiers tend to reduce their consumption expenditure, before potentially defaulting on their mortgages. On the other hand, investors are more likely to sell their investment properties which amplifies housing market cyclicality.
But they still think that it's appropriate to let investors borrow more than owner occupiers
Yeah, somehow their thinking is "Investors will make the financial situation worse, therefore we will make sure there are more of them". Their thinking is backwards, I suspect the only reason they are making a special case for investors is because they look at the PM, a declared housing specuvestor and want to butter him up a bit.
Well it's a start - can't say I'm surprised. Suffering from severe survivorship bias claiming that investor DTI should be higher because investors ran up leverage during the recent boom.
Of course they would, having a higher DTI while leveraging negatively against multiple incomes in a rental market heavily subsidised by the government. Poor sods. I thought the main driver in neo-liberal economics was a free market. The NZ property market keeps drifting further and further away from a free market with every unbalanced intervention.
Here's a thought, what would happen to property prices if the accommodation supplement was removed today? Or if DTI for investors was the same as OO. Or if there was an appropriate tax on unproductive land? Or CGT? Or a hefty tax premium on unearned income?
I don't think we care about the real economy here at all, financialised everything, productive nothing. I do wonder what happens when China stops buying the white gold.
Or a hefty tax premium on unearned income?
This got me thinking, and this is a genuine question: If someone owns a large parcel of rural land and they lease that land for $x/Ha to someone who grows corn on it, is that considered unearned income for the landowner? What's the difference to being a residential landlord? Extending that, should any tax on unearned income also be applied in this scenario, and what would happen to food prices?
I guess a "business-is-business-is-business" rule could be applied across the board by allowing residential investors to claim everything a "normal" business can, but apply business lending T&Cs and interest rates accordingly.
Yes, that's unearned income.
These questions are a big part of what people like Henry George, Adam Smith, the Physiocrats, Winston Churchill etc. all wrestled with. The idea of "ground rent" or a land value tax are all basically about taxing unearned income gained from exclusive monopolies, such as freehold property rights. It's the same concept as Norway's tax on oil extraction (you can profit from discovering the oil but get taxed on extraction, and this funds their sovereign wealth fund), or charging for use of specific radio frequencies. There's a limited supply of locations/oil/radio frequencies, and no one created those but God, so profiting from them is "unearned income".
Residential landlords make two kinds of income, land rent and "improvements" rent. The land rent aspect is unearned, the "improvements" rent is earned (it's capital, rather than a natural resource). The influence of Henry George's ideas is actually why our city councils usually split council valuations for rates into two categories, improvements and land (and some of them only charge rates on land value).
Here's a thought, what would happen to property prices if the accommodation supplement was removed today?
My guess is mass homelessness. shanty towns? More freedom camping?
I hate the accommodation supplement but now its here I fear the outcome of it being removed.
This would be the initial phase of homelessness, however followed by a period of readjustment of decreasing rents as the supply of rental housing went through the roof and exceeded demand. That or the owners would sell up and cash out, leading to a bigger shortage and rents going back up.
" what would happen to property prices if the accommodation supplement was removed today"
Many more landlords would be at risk of increased cashflow stress. Many landlords who would be even more negative cashflow than they are currently, and be under more cashflow stress. Those unable to continue mortgage payments would come under pressure to sell or move their property from the long term rental market to the short term rental market. The issue is that there is insufficient social housing currently to accommodate lower income earners who require housing in the long term rental market.
More existing properties would likely be listed for sale from cashflow stressed property investors.
Would also need regulations to stop landlords taking their property away form the long term rental market being moved into the short term rental market.
Landlord here. In my area of NZ I get dozens of applications for every vacant property. Some rely on the accomodation supplement to compete, but most applicants don't get it. I suspect if the supplement is removed, rents wont change and but the social housing waitlist and homelessness rates will increase. I'd love to be wrong here.
It's about 2.5 billion dollars into a 15 billion dollar yearly transaction. Or about 16%, $100 per rental per week. Though it is skewed to the lower end rental market so if you consider it is propping up rents of the lower half of the rentals by ~$200 per week, then you can see the market intervention at play.
Remove it and aggregate yields go from 4 - 5%, down to 3.3 - 4.2%, potentially less, where else would that $2.5b come from to uphold all of the rent? The same amount of people competing for the same amount of rentals in the same cost of living crisis with 16% less money to give. Only huge migration would fix that, even then we simply do not have the income and jobs to support higher yields than this. So in the absence of another major government intervention, I can't see this yield equation improving any time soon, which means housing as an investment is relying completely on capital gains, some greater fool taking out a larger loan for a lower yield at a higher rate of interest.
At 5% yield, an investor will need to find the other 9% yield elsewhere to meet DTI of 7. (assuming a 100% equity based loan)
In the 2020 budget, almost $2.4 billion was allocated to the provision of AS (accommodation supplement). There have been substantial increases in Government expenditure on AS over the last twenty-five years. Even so, many New Zealand households face significant affordability problems.
It is estimated that 361,000 households in 2019 were in housing affordability stress (according to the 30% definition) prior to any Government expenditure on AS. Most (65 percent) AS households are not owner occupiers and mostly rent in the private rental market. Less than half (45 percent) of AS households have very low household incomes of $50,000 or less. On average, an AS household receives AS of $4,007 annually.
Removing the accommodation supplement in one go is largely a theoretical exercise.
A more realistic approach would be its gradual phasing out combined with other structural changes in our housing market.
And yes, I agree with you that this needs to be done. At present it is simply lining the pockets of landlords (mainly those at the slummier end and landbwankers) and is massively distortionary.
I've mentioned on other threads that NZ's retail mortgage rates are largely US prime rates plus a 'risk premium' that foreign lenders apply to NZ to compensate for additional risks.
A big plus here is that foreign lenders would probably accept a lower 'risk premium' with DTIs. Thus NZ's mortgage rates could get closer to US prime rates. I.e. lower rates after DTIs are implemented.
Good news, huh?
(But DTIs won't happen. The NACTF will kill them at behest of the banking lobby. Wait and see.)
As others have said these measures are overly timid. But we can’t really blame the reserve bank. The national party is so far in the pocket of investors that they’ll be lucky if this doesn’t get vetoed - either immediately or any time it looks like it will constrain property speculators.
Why should investors be at a higher multiple and what is this “efficiency” they speak of? Is it inefficient to have to generate positive cashflow? I guess it is when the government lets you write off interest costs against tax owed while letting you keep tax free capital gains.
How many of these 7+ multiple loans are “efficiently” losing money in the hopes of future capital gains?
In a statement Reserve Bank Deputy Governor Christian Hawkesby says the financial stability risks of boom and bust credit cycles are significant, so it’s important to have appropriate policies in place to manage them.
You don't need a PhD and a fancy pants title at a central bank to understand Werner's Quantity Theory of Credit. But what Hawkesby needs to do is be honest with himself and stop positioning the RBNZ as God and suggesting that his organization's tinkering can ensure that the sheeple can have its cake (property ponzi) and eat it too (no financial instability).
The Anglosphere seems to be at peak ponzi and the only thing that really takes it out is a black swan that triggers a depression. The RBNZ is simply virtue signaling and keeping up appearances to show some kind of faux concern.
You should consider yourself lucky that some people are interested in this and willing to share insights.
As we've already seen just this week, the Fed has transformed the discount window from an emergency measure into standard operating procedure. Any idea why this is? The US banking system’s power to expand and contract credit on its own through fractional reserve banking makes the Fed’s job of manipulating markets that much harder. Consolidating all bank lending into the central bank provides much more direct control over the creating and extinguishing of money.
If the Fed wants to be not just the guiding hand but the sole arbiter of the money supply. It wants not just to be the lender of last resort, but the sole lender.
I suspect you might not be able to see the relevance to Nu' Zillun. It should not stop you from making an effort to think. It's in the interests of everyone.
There is no situation or solution that solves NZs housing problem without halving prices and a reset from there. DTIs of 3 can do it. Bring it on I say. Drop the rents 50% and the country might work for a few nurses, teachers and policeman. Currently the place is set up so the Uber weathy can hide their ill gotten gains
Why does that matter. I am not hiding ill gotten gains. Fact is people from all over the world have been able to bring in capital, invest and live off the capital gains tax free while consuming the services of the policeman fireman and teacher and nurse who are perversely taxed highly and lowly paid so that those wealthy people can have free services. Anyone who is for that system, is either totally self obsessed or thick as a brick.
It's a glitch in the matrix, a logical anomaly, and a sick system that cannot do anything but destroy itself either through design or revolt. It is NZs apartheid, and needs to booted into touch.
What percentage of immigrants do you think "bring in capital, invest and live off the capital gains tax free while consuming the services of the policeman...?" A clear minority.
But don't let immigrants work ethic frighten you. Typically, they succeed and leave kiwis behind. I'm an immigrant, son of a mechanic and cleaner. I'd be intimidated by Asians and their clear dominance in the STEM disciplines. As I openly admit, smarter and harder working than me. Glad I'm retiring this year.
IMO the solution is time. IMO it could be that house prices flatline for the next 5-10years, which is basically a drop when you consider inflation. The thing is that house prices in parts of NZ have crashed from the highs, and even higher when accounting for inflation. (crash being 20% or more) People in the property market for the last year have been saying that house prices have turned upwards, but then the next month figures show the opposite.
One unforeseen eventuality of DTI's is that they can increase rents. If people are restricted getting into their own homes, and investers are making less in capital gains, there will be upwards pressure on rent.
People often look to other OECD countries with DTI's of 3 or 4, and the subsequent lower house prices. What they often forget is how high rents can be in these comparative cities. See average weekly rents in NZD below:
Auckland $660
Sydney $815
Singapore $1400
London $1206
Amsterdam: $585 (skewed by a ubiquity of historical apartments I suspect)
Melbourne: $570
Boston: $1480
Auckland is definitely on the lower end and it is by far the highest rent area in the country. I see upwards pressure on rent throughout 2024. I would be very surprised if the median auckland rental is less than $700 pw by Christmas..
Rents go up based on income, with some influence from supply and demand. Landlord costs and house prices don't affect rents.
Yes, rents will probably go up through 2024, because household income will rise. Rents will remain at ~20-22% of household income in Auckland, as they have done for the past 20+ years. https://johnbutt.substack.com/p/rents-are-rising and other articles on his substack have good information about market saturation rates of rentals, and immigration, migration, and new builds will affect the number of rentals available (and thus rent prices).
DTI will have no effect.
Counter to this, with rising unemployment from the decrease in spending, we will likely see average income decrease as a result and rents could drop. Higher unemployment may lead to more people moving out for cheaper rent, leading to greater supply of rental housing.
People often look to other OECD countries with DTI's of 3 or 4, and the subsequent lower house prices. What they often forget is how high rents can be in these comparative cities.
You need to expand your thinking. Using the Bay Area as an example where housing costs are oppressive, companies need to offer enormous salaries to recruit people to work in the area, which makes employment costs very expensive. And even if you have taxpayer-funded initiatives to lower the burden of those housing costs, the burden falls on taxpayers.
It's simple really. You can't have your cake and eat it too.
Most of the responses here are from people who do not have and probably never will have a property (say it with regret of course), so it's easy for them to say why not reduce the DTI to 3.
If people could borrow half of what they're today, it would create a financial crisis.
The crisis began 2008 when QE was implemented. Flooding debt into the system to mask the true downturn in the global economy has allowed continued house price increases that would not have happened without the intervention. USA have created unseen levels of debt, then sold it off to the world and everyone has effectively printed their way to a softer landing that should have been in a free market without intervention. They are now stretched financially thin and may not be able to maintain their global military presence and are slowly coming to the end of their abilities to maintain their empire. We're coming to the real outcome of capitalism, where the few at the top have amassed so much power and influence they can devour others who threaten them and influence policy to benefit them yet again. The question lies as to when another country decides to take advantage of Americas position, and when the masses accept that this is a broken system that needs a large overhaul form the top down.
We have become addicted to private debt. So much so that we believe it's the only way of making money. We can export stuff. Our government can spend money. So what happens when our account balance is in huge deficit and the government stops spending money? People get hooked on the idea that private debt is the only thing that can support our economy, whereas it's gradually shrinking the real economy and making others rich off our backs.
But regardless of all that, if the only thing keeping our economy out of financial crisis is a housing bubble, then we're already in financial crisis.
I’m sure the reserve bank would progress the discussions on the introduction of the DTI simultaneously or just before a gentle pivot on OCR trajectory. DTI of 6 would be a good start, and I’m betting this is in conjunction with coming announcements on a revised path for our cash rate. Just a guess
First Concrete step to Socialism -
The capitalist society of New Zealand is collapsing with these draconian measure to restrict property ownership.
Radical socialism controlling how much property people can purchase.
Labour appointed a communist in charge of RBNZ and this is where we have ended up.
No mention around the economic consequences of the significant amount of high net worth Property Investor families who have very high equity and cashflow, who have DTI’s well above 7.
Who finance significant other business operations and property development operations, through equity in property.
Who will now no longer be able to finance further operations.
And the drastic reduction in Economic Growth for New Zealand, that will occur, when DTI’s are introduced.
Are the RBNZ not capable of understanding the un-intended consequences ?
No mention that DTT's are mostly used for Home Buyers.
DTI's will affect the engine room of small business that is one of the core drivers of business in New Zealand.
Doesnt affect me, I am retired.
But this is just another step to Communist Oblivion, another step for NZ to becoming another Russia / China / North Korea.
What a load of BS.
What about the unintended consequences of letting the market keep doing what it's doing. The current system isn't working for a huge amount of people that would have been fine in your time.
We shouldn't be proud of a falling birth rate and high immigration - that's a failing country.
Far too overexaggerated. RBNZ may have been incompetent through the 2020-2022 turbulence of which we are now reaping the unintended consequences, and the purpose for all of this is to try and reduce the boom and bust economy caused by residential housing being used as a primary speculative asset for building wealth. When he/She who already owns a house could leverage i and outbid FHB's at every opportunity with low barriers to do so, it was logical to stack house after house and expect others to pay them off while reaping capital gains in the long term. Now we have a generation who may not be able to own a house and afford to have children due to lack of action. Simply saying that we should do nothing and let the money keep flowing through keeping the status quo. Neverending growth is an expired concept. Change that removes some advantage of those who already have, will help those who have not.
Yes they can, stop trying to buy your first home in central suburb, and buy a run down house in the fringes or small town, and trade up.
I lived in a shitter in massey for many years, worked 2 jobs and renovated it.
Instead of moaning you cant afford it, actually take some action, solve the problem and get the job done.
Sick of all this pathetic whinging.
I was wondering about why investors got a higher DTI than OOs. Was there a tax angle? Should perhaps the ratio actually be lower for investors to spread the tax take further? (Also, is the RBNZ looking at the outcomes, i.e. raw facts, without understanding why the situation is as it is?)
Consider the following. Wifey is the major income earner. Hubby is semi-retired earning much less. They decide to buy a rental. For tax reasons (minimization) the house is owned by hubby and the rents are taxed at his (lower) rate of PAYE tax. If the bank considers his income alone, having a higher DTI means he may squeeze in to get a mortgage on his own income. Having a lower DTI, the bank may insist both incomes are assessed. At this point it should be clear to IRD that the asset is in fact a joint asset and the income should be split between hubby (at his lower tax rate) and wifey (at her higher rate).
I've emphasized 'should be clear to IRD' because this whole area is a mess of tax injustice. For example, current matrimonial property law would consider the asset joint (and the income also joint) if no legal arrangements were put in place to explicitly separate the ownership between wifey and hubby.
Ask for clarity on this from IRD and you'll get multiple different answers. Most couples I know appear to make up their own rules and IRD seem to accept them without question.
If Terry hasn't already, I'd love to hear views on how IRD treat these sort of arrangements.
While this seems like a step in the sensible direction I'm not convinced it will curtail house prices as some here are hoping.
In Ireland as it notes above, there are similar LVR limits to NZ + a DTI of 3.5. But house prices in Ireland are as high if not higher than here. It just means that you save a deposit for longer then take on less debt, so the banks are less exposed in the event of a downturn, and peoples mortgage repayments will be a bit more manageable, but people will still over pay for houses and prices still run away. What actually happens in Dublin is young people use parental equity or savings to get their deposits up and reduce the debt side of purchases and achieve allowable DTI's. So again wealth people get wealthier.
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