Having previously opposed the Reserve Bank (RBNZ) introducing debt-to-income (DTI) restrictions on banks' home loan borrowers, now they're going ahead, the New Zealand Banking Association (NZBA) wants them loosened.
In January the RBNZ said it was proposing to introduce 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 consultation paper the RBNZ said it was 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 has proposed 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%.
in a Submission to the RBNZ on its consultation paper NZBA suggests: "There may be some impact to owner-occupier borrowers under the current proposal of a DTI of six with a speed limit of 20%, due to some banks’ internal (more conservative) thresholds. We submit that a higher limit should be set for this borrower group, at a minimum of 25%, to allow for any additional conservatism."
It also argues the RBNZ's proposed setting for property investors is too low.
"There may, in our view, be some impact to investor flow at the current proposal of a DTI of seven with a speed limit of 20% due to complex lending scenarios. We submit that a higher limit should be set for this borrower group, i.e. 30%, to allow for these borrowers to still participate in the market as their DTIs tend to be higher," NZBA says.
The lobby group does, however, support the easing of LVR settings as proposed by the RBNZ.
Current LVR limits set a 'speed limit' on how much new low-deposit lending banks can do. At the moment the RBNZ 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.
The RBNZ has said its DTI proposals reflect an "approach of calibrating DTI restrictions, so they act as guardrails – in which they are binding during booms [such as 2021] but minimally binding during other times."
Dire warnings
In 2022 NZBA warned of "a real risk of adverse customer impact" if the RBNZ introduced DTI restrictions. And in 2017 NZBA argued the RBNZ hadn't established that the benefits of a DTI tool outweighed its costs. Additionally NZBA argued DTIs could create a number of unintended consequences for both the housing market and the economy.
In 2015 NZBA pushed back against an RBNZ proposal to set a 2% speed limit on the LVR restriction for Auckland residential property lending, which would've meant banks could have done very, very little lending at LVRs of 70% or above to Auckland property investors in order to make sure they didn't breach the 2% speed limit. NZBA argued for a speed limit of at least 5%. Ultimately the RBNZ set that speed limit at 5% in November 2015, meaning no more than 5% of Auckland investor lending by registered banks could be at an LVR exceeding 70%.
Prior to the RBNZ announcing plans to introduce LVR restrictions in 2013, NZBA questioned whether there was any need for the use of such macro-prudential tools, with LVR restrictions on low equity lending its least favoured option of four potential RBNZ tools. NZBA described LVR restrictions then as a "weak tool with low welfare gains from a policy perspective," saying they'd be difficult and costly for banks to implement.
Consultation closed on the RBNZ's proposed DTI settings and changes to LVR settings on March 12.The RBNZ says it'll now decide on the activation and initial settings of the DTI tool, and expects to share its decisions in the middle of 2024.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
18 Comments
Of course the banks will argue the DTI ratios are too restrictive.
They want them set so high they're are of no consequence at all. Banks don't want DTIs at all. Ever. They love the wild west where they can play fast and loose and damn the consequences to NZ Inc. (including low productivity as so much 'investment' goes into low productivity assets for an un-taxed capital that is by no means assured).
Like I've said, I expect the chances of DTIs actually being implemented at no better than 50 / 50. The RBNZ may need to play hard ball if they really, really want them ... But do they? If they do play hard ball, the OCR may well stay high for a long time thereby forcing the banks to recognise much reduced profits.
That would depend on the level the DTIs are set. The initial levels are quite high (i.e. loose) in comparison to the levels other central banks have set. But, like LVRs, they can be adjusted downwards to have the effect you suggest. It is a way to adjust how much money is pumped into residential property but how well it will work is open to debate. A side effect is that banks may look to create money for things other than residential property lending - like actually building stuff. Oh well. I live in hope.
I feel they will only have a minor to moderate effect on the peak end of the market next upswing, however without having another unprecedented lockdown situation it's hard to argue that we'll ever se the same level of FOMO occur again that would warrant such insane price increases.
Honestly you couldn’t make this stuff up. The notion they are trying to protect owner occupier or investors is quite laughable. It’s also very sad they are so hell bent on running the “long running” shit show they call the housing market. It’s actually the banks own personal ATM. Boy will they protect this monstrosity at all cost. I believe 2024 will be a critical year in terms of the housing market and the relationship between RBNZ, government policy and the banks. I’ve left the biggest group out (NZ population) because we have no actual input. I say this because the vast majority of New Zealand citizens actually want to change the current system for the long term benefit of all citizens. We are so fed up with Poor housing, extreme house prices, extreme profit made by the banks and not enough houses. We are slaves to a lifetime of debt fuelled speculation. It’s a total shit show with groups of politicians, bankers (including RBNZ) who are not listening and clearly protecting their patch.
100% agree.
It certainly feels like the average Kiwi is a bystander while one of our institutions fights it out with capitalistic banks using massively destructive tools that are not fit for purpose, while the government stands idly by intent only on tearing stuff down while building nothing helpful in its place.
I disagree on your summation of what kiwi want. If they really wanted change they would vote for it, instead the vast majority voted for the continuation of the said shit show. If we want real change then the majority need to get their head around the idea that there's more to the political world than just green and red versions of neolib.
I take your point, however, maybe I didn’t make my points clear. I’m still convinced that the vast majority of NZ Citizens want change in terms of how we facilitate housing our population with fairness and improved outcomes, quality and affordability. The underlying point I’m trying to make is no one seems to be offering any bold policies that can be understood, balanced with a vision for the future. It’s all the same stuff that gets recycled every 3 or 6 years resulting in zero progress or reverse outcomes. We are currently in reverse with zero vision for the future. I don’t see any political party in NZ offering any bold policies for changing housing outcomes. Same old, same old. Is this what we collectively elect them for?
I would classify TOP policies as bold and to a large extent focused on improving the housing situation. Whether or not you think they are the right policies is another issue of course. Whatever the case, drastic change is a tough sell, especially when it comes to tax. A shame because it really is at the heart of so many issues.
Yeah exactly, Top offer so much - but hardly anyones ready to give them a proper go (or has even heard of them). I’m convinced if they just changed their name from Top (which may come across as a bit elitist or mysterious) to The Affordable Housing Party they’d double their support overnight. The average kiwi responds to sound bites, headings (classic example, “tax cuts - oh goodie I’ll be better off!”) and sadly don’t want to waste much time actually reading into different parties policies. So, make it obvious.
Don’t forget people DID vote for it back in 2017, Labour promised 100k housing supply and cap gains tax. Then reneged, then they tried again when Hipkins came in, there was another big push for it. Followed by surveys showing majority support for such a tax. But he lost his nerve. I just cannot forgive them for not grabbing the bull by the horns when they had a sliver of an opportunity (not once, but twice)
100% agree too. It feels like this is our last desperate hope for an actual anchor and control over a hideous beast of a housing market that is terrible for the average person and a functioning economy. Who do the banks think they are, to try and undo such controls, just in the name of their own profits? I hope the RBNZ take zero heed of this bullshit and press ahead as planned.
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