Reserve Bank (RBNZ) Governor Adrian Orr has hinted debt-to-income (DTI) ratio restrictions on banks' mortgage lending could be deployed with relatively loose settings when the option becomes available next year.
The central bank lobbied the Government to approve the addition of a DTI tool to its macro-prudential toolkit for years and was eventually given permission by Finance Minister Grant Roberson in 2021. Some politicians were reluctant to back DTIs, fearing they could prevent first home buyers from getting mortgages.
Now, the regulator has permission to use the tool and has told retail banks to be ready for it to be deployed by April next year.
However, the RBNZ’s leadership is coy about whether they will push the button or not.
Assistant Governor Christian Hawkesby said no decision had been made on whether a DTI ratio rule would be put in place, although preparation work had been done.
The RBNZ plans to consult on possible implementation and initial settings during the first quarter of next year, ahead of the ‘be ready’ date given to retail banks.
It said the restrictions could take effect from around mid-2024, if implemented.
Behind the scenes work has included looking at how the ratio would interact with the existing loan-to-value ratio (LVR) restrictions on low equity mortgage lending, and how it might affect first home buyers.
Governor Orr said, almost unprompted, that a DTI ratio could first be set up with loose enough settings that it doesn’t restrict buyers' access to credit. The current LVR ratio rules weren’t the “constraining factor” on people wanting to borrow, it was more about whether they could afford the higher interest rates.
“The debt-to-income ratio can be put in place, but that doesn’t mean it will be binding, initially,” he said at a press conference on Wednesday.
“But the fact they are in place, is that when they do become binding, its for the right reason — slowing excesses in the economy," Orr said.
In a regulatory impact assessment released in April, the RBNZ acknowledged the housing market was “currently in a downturn” and therefore there was no “immediate need to implement DTI restrictions.”
However, the housing market has stabilised since then and most regions have begun to see prices increase despite high interest rates suppressing buyers’ borrowing capacity.
The incoming Government is expected to pass property-investor friendly legislation that could push up prices, while high migration and building costs threaten to trigger a fresh housing crisis. It is possible the RBNZ could choose to put DTI restrictions in place in anticipation of future risk-taking in the property market.
DTI restrictions will set limits on the amount of debt borrowers can take on relative to their income, thus limiting the amount of high risk mortgage lending that can take place.
The central bank hopes this will reduce the chances of a housing related financial crisis in the future. It may also allow the regulator to loosen its LVR restrictions.
How the new rules impact first-home buyers will depend on the exact settings chosen, but investors tend to borrow at higher DTI ratios on average and would likely be most affected, the RBNZ says.
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Don't get your hopes up.
Governor Orr said, almost unprompted, that a DTI ratio could first be set up with loose enough settings that it doesn’t restrict buyers' access to credit.
They will set the DTI limit at something completely useless like 8, and move it between 7 and 9 depending on how they want to juice the property market.
"what amazes me is that Kids have little understanding how everyday finances work when coming out of school"
The primary purpose of formal education is for vocational training as an adult.
Most of the essential life skills are not taught in most schools. Some are learned at home or in their local community vicariously. Some are never learned.
If the parents / caregivers are financially illiterate and have poor financial habits, then there is an increased probability that the children will learn similar lessons and habits. Many people don't know about these skills, and then continue to be financially ignorant and financially illiterate.
Several years ago, a high school in a low socio economic area offered courses teaching these essential life skills to their students at the end of year:
Services Academy students attended Life 101 and 202 Programmes this past November. In Life 101, the students learned about the following:
1. Personality profiling
2. Producing a C.V. (Curriculum Vitae)
3. Basics of business
4. Saving money
5. Preparing for a job interview
6. Basics of the share market
7. Basics of property
8. Personal budgeting
9. General health, fitness & well-being
The Life 202 featured more advanced concepts taught in a variety of business leadership and community programmes including:
1. Financial literacy
2. Teaching your children about money
3. Investments
4. Exploring personal beliefs and values
5. Defining personal leadership
6. Effective personal communication skills
7. Emotional intelligence
8. Dealing with the “tough stuff”/ conflict positively and effectively
9. Goal Setting
10. Giving Back
11. Public Speaking & Effective Communication
12. Personal Roadmap Development
A child born into a family who has wise and financially savvy parents can have a massive head start in life compared to a child born into a family who is financially illiterate and have made life choices that have resulted in undesirable outcomes.
That ratio range is probably about right. It will stop banks lending to people who really shouldn't. It will target the frightening fringe without interfering with the core of the housing market. It will save many from mortgagee sales and their own ignorance which has to be the priority. The DTI can be lowered in time.
It will have next to no effect. A DTI above 6 only really restricts the market when interest rates are very low:
For a DTI of 6:
3% 30yr P&I = 38% of gross pay.
5% 30yr P&I = 50% of gross pay.
7% 30yr P&I = 63% of gross pay.
9% 30yr P&I = 74% of gross pay.
3% IO = 18% of gross pay.
5% IO = 30% of gross pay.
7% IO = 42% of gross pay.
9% IO = 54% of gross pay.
You're saying that as if restricting the market when interests are low isn't a huge gaping hole in our regulations that lead to massive instability in the housing market just a couple of years ago.
Interest rates and LVR are doing the work now, we need to patch the holes before the next flood of cheap money.
They have to get it past Sir John's boy Luxon first. (Golly I'm becoming cynical in my old age.)
Best to get the process in place and let the RBNZ ratchet it up once National is no longer in power.
(Ditto LVT, CGT, Wealth Taxes. etc. Start small and then tinker. But get them on the books!)
The problem is following generations wont take it. So they go elsewhere. Society fills the gaps with migrants. Problem solved right?
Older speculators become incoherent and incontinent, needing to be placed into a home to cater to their needs. Kids wont return because fuck the cost of living, so rely on the aged care system to deal with it. What sort of level of care will they expect to get from a migrant care worker?
An easier system to administer and harder system to game is a stress test of 10% minimum (or 500 basis points above the OCR) for owner occupiers. 15% (750 basis points over OCR) for investment property lending.
This would solve a number of problems. The other would be to restrict owner occupied home equity use, unless building a new home.
So many issues could be solved by simply forcing all property investment into new builds.
Well they'll be limited in how much they can borrow, and may have to declare more income. Many of our debt stacking property investors would be classed as paper rich and cash poor.
DTI's could be a thorn in their side, as rental income is typically much lower than salaries. So if someone is maxed out at the DTI but still has plenty of equity to leverage, a property rented at $30k = $240k mortgage @ DTI of 8. Not going to buy much for $240k.
Still a question of how much of the gross rent will count as income. I think when the banks were unofficially monitoring DTIs a few years back they had a pretty basic rule of counting some fixed percentage of gross rent as actual income, rather than properly calculating net rent. Can't remember the number, maybe 60-80%?
Either way, the restrictions could be even more stringent than you suggest.
Recently secured a mortgage for a home with a minor dwelling. I was informed by the mortgage broker that we needed to say that the occupant of the granny flat would be a boarder rather than a tenant. That way, 100% of the rent would be considered by the bank in my mortgage application.
It makes sense when you don't think about it.
So they're saying how to be able to borrow more than you really should have access to in a high interest environment because they don;t have to deal with the fallout if it all goes belly up? Not that I'm asserting you would but you see the flaw in the system here based on the vested interests of mortgage brokers.
All that will affect is FHB/owner occupiers as most investors don't deal with retail banks as they perfer 2nd tier and with 2nd tier interest being pretty competitive. All the RBNZ is doing is making it harder for people to purchase their home. Also Could being the word
This was brought up with previous restrictions like the LVR. Pretty sure the RBNZ said they would monitor the non-bank lenders and include them in the regulations if they see a dramatic shift of lending away from the regulated banks. I expect they'll do similar this time.
You want a bet on that. Cast your mind back 18 mths ago when all the scribes were saying housing crises is over with all the new consented houses we were experiencing for one year that NZ had caught up how did that work out. Can guarantee that in a yrs time ten yrs time the same people complain about the issues we are facing today will still be complaining while the more things that change the more they stay the same
What's the bet? From memory, non-bank lenders are about 5% of the market at the moment while investors make up about 1/3 of mortgage applications so currently non-banks have a small piece of the pie. My argument is, if they suddenly jump to 10-20% of the market (if they even have the balance sheets to support such a large increase), the RBNZ will take action. So, either they stay irrelevant and keep their heads down or they get brought into the same or similar regulations as the real banks.
I agree, many are pre-disposed to complaining. I'm not sure of the relevance to my comment though - what do you think I'm complaining about? I think it's great the RBNZ is starting to use the tools available to it to make our housing market more stable.
Because most investors have only one to two properties retail banks will still loan after 3-4 depending on how banks feel they won't loan to you. So yes you are right as only a small percentage of investors go pass that. Also when you are developing etc retail banks don't like that so again 2nd tier.
Do you think these companies like Resimac have a limitless pool of funding to dip into? If we have a huge shift of investors away from retail banks to 2nd tier, they'll have sufficient capital to take on these customers?
At best they're boutique loan sharks for overleveraged investors. Think "Instant Finance" but for landlords.
They may struggle to get the capital given the fraught history of finance companies in NZ. Would you invest in a second tier finance company mostly funding developments and investors who are too extended for the main banks? I'm invested in Heartland Bank but wouldn't go much further down the food chain.
Again alot of investors only uy one or two houses and it's financial better for them to use a retail bank again get up to 3 to 4 then 2nd tier which I think from memory is 10 percent of property investors then after 7 then you only deal with 2nd tier and I think that's 4 percent could be wrong on that. Resimac as an example is Aussie owned. If they go the IF way I don't have money invested with them better to owe money. Just like a standard bank never invest money in a bank unless you buy the shares better to owe the bank. P.S I run 32 percent debt so not over leveraged plus I develope new builds so retail banks are no good for me imagine what would happen if DTI come in how many developers would be able to developments even less houses than what we have now
PS also if you set up a company they are not controlled as much as an individual and DTI dosnt really come into it. Again all it will do is affect the small person trying to get a house. Another thing is it will push up house prices in the so called hick towns (as some like to say on here) were wages to house prices are way more favorable. Finally I am just finishing a 4brm brand new build mortgage free do you think I would find it hard to borrow money on that?
If the DTI is implemented, the banks will be asking you about income as much as about equity. So the answer is - for the next six months, I think you would find it very easy to borrow money based on that. Beyond that date, I have no idea what your circumstances or the regulatory environment will allow.
You're correct - I was a little too generous about the non-bank lenders elsewhere in the thread. Currently they provide 1.5% of all housing lending. Well down from their peak around 6% in 2006.
https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/registe…
Excellent as they will be more eager to loan money out at more favorable terms just secured money thru Avanti floating at 9.1 percent. Which is pretty close to ANZ. All I know from pass experience with govts interfering and bringing in more laws is it hurts the small person trying to get a house would you not agree. A side note also with a new govt Orr will be trying to keep his job I somehow feel this is all smoke and mirrors
On the DTI, I would not agree. The methodology targets investors and other second+ home buyers far more than FHBs or workers moving up the ladder.
If there are real concerns, with the LVR regulations the RBNZ had no problems setting different levels for different groups so FHBs weren't so affected. I don't see why we couldn't do the same with DTI.
House price’s are way out reach for most of the population to buy from scratch. In fact most of the owning population at today’s prices would not be able to buy their own home with a DTI of 5. If we want a good fair society the housing ponzi need to be destroyed and people should invest in more productive areas like businesses and innovation in a country with so much land per capita it’s crazy that the younger generations have no chance of have owning a property to live in while older generations have 2 or 3 rentals.
This is nothing to do with RBNZ though, and everything to do with public policy settings in infrastructure, planning, taxation, and migration. You don't get to print tax-free capital gains at anywhere near the clip that pushes everyone into housing if you ensure there is adequate housing to meet demand, and that those capital gains are taxed (or LVT).
You only get concerns with overleverage, when the investment proposition is extremely favourable because of either actual, or perceived inability to solve the above mentioned issues.
Maybe there is something wrong with NZ young people? Because all those migrants that are pouring in to NZ seem to have no problem with buying houses - with 60% of FHB accessing the low deposit FHB scheme being permanent residents*. Maybe having a strong work ethic and the desire to save your money instead of spending it on avocados, travel and "experiences" is more important than DTI's?
*https://www.oneroof.co.nz/news/first-home-loan-scheme-is-open-to-abuse-…
Looks like financial markets and assets are going to crash. Anyone who purchased in last five years will find themselves with huge mortgages at high rates. House price’s are already down 20% from highs in many areas this will get much worse people just need to understand they have been caught in a Ponzi scam and will be paying for it until mortgage is completed. Expect rates to stay higher for longer because only way for governments to pay back debt is to screw over a many people as possible for a long a possible ie mortgages any debt will become expensive to have.
Any intervention like this, while it NOW maybe necessary, is like regressive taxes, in that they are admitting that the system is out of control, like a runaway train with the driver still madly stoking the boiler and the only way to slow it down is bigger and bigger brakes.
But not once do they think about not continually feeding the fuel in.
I really don't get the whole DTI thing. Isn't what the banks are doing currently with lending essentially the same thing ? The banks already limit what you can borrow. Don't see the point it will become laughing stock no matter what number they put on it because some people here seriously think that when its set at 3, house prices will fall to match it. The setting will probably be more like 10 which again will result in more laughter.
Zwifter best to get debt down asap. Anyone over leveraged will be under huge financial pressure many will get wiped out causing price’s to crash at a accelerating pace. Much depends on US fed who are trying to keep inflation from skyrocketing while are happy seeing inflation eat away at 32 trillion debt. NZ will just follow the narrative that’s why NZD continues to be under pressure.
The issue with a low DTI is that a lot of people will immediately be in breach of their lending covenants.
Another issue with a low DTI is people will not be able to borrow enough to pay to build a house.
I understand the reasons for wanting to have it, but things need to be phased in unless believe what remains of our construction sector moving overseas and every cafe losing half of their patronage in an afternoon is a good outcome.
That's interesting, is DTI a financial stability measure, or a method to achieve a political ideology?
The Labour party coerced investors into buying new builds and it led to the biggest boom then bust (unfolding now) our building industry has ever seen. Williams Corp has a large debt repayment due before Christmas, which they have already postponed for 6 months, and the market does not know if they will default or not. Thousands of homes exited the rental market and became AirBNBs or social houses as a way to increase net cashflow, creating a squeeze on renters that the media is only starting to pick up on.
If they want to bring DTI , just bring it .Don't do this kind of buildup/gossips .
50Billion of LSAP was brought in a week ? Can't cause any more harm than that for a quick implementation of DTI.
By giving this kind build up of upcoming DTI , they are ( or they want to ) creating FOMO and so many home buyers ( mainly FHBs) are going to rush in .
Governor Orr said... it was more about whether they could afford the higher interest rates.
That's indeed the crux! And it's not being captured by DTI nor by LVR. The "E"xpenses is absent. The correct measure should be an ETI ratio, (expense to income). The "Debt" is already captured by the "L"oan in the LVR, it's just named differently.
The thing that DTI does, which your ETI would not do, is put a limit on lending when interest rates are very low. When you could borrow at 2.x%, the associated expense is very low and therefore permitted lending very high. This is bad for stability as we saw with the crazy house price rises, and current increasing mortgage pain as rates rise.
History AGAIN. Hohummmm..
We get into these mortgage repayment issue cycles, then put in debit ratio restrictions that are meant to provent these issues BEFORE issues happen
Economies stablise and the next government bribes voters to take them off.
And the cycle starts again because humans think they are clever in saying "know history, you will know the future.." and dont.
This is the 4th, maybe the 5th cycle have seen in my life time...Im pretty sure posted along these lines here some 25yrs ago.
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