The falling housing market is bringing a welcome reduction in the amount of debt stress that home buyers are taking on with their mortgages.
New mortgage borrowers are continuing to stretch themselves much less thinly than they were, according to the latest debt to income ratio figures produced by the Reserve Bank.
The latest figures are a continuation of a recent trend, given the way mortgage interest rates have risen sharply and the fact the housing market has been falling. The RBNZ says that debt-to-income ratios of new borrowers have now been falling for 10 months. Previously we had seen some pretty eye-watering DTI ratios achieved.
The data will be further relief to the RBNZ, which had to watch the debt to income ratios race higher and higher over the past few years.
It means of course that while new mortgage holders now are coming on a lower DTIs - those who took on mortgages at very high DTIs a year ago are still in a very geared situation. But in terms of people now borrowing, the ratios are looking a lot less precarious.
The RBNZ had sought for some years to get a debt servicing restriction, probably a debt-to-income measure, included in its 'macro-prudential toolkit' - which already included such things as the loan to value ratio (LVR) restrictions.
Having finally received government approval the bank is working toward having a debt servicing framework ready so that restrictions could possibly be brought in by March 2024 if needed.
The RBNZ keeps a close eye on borrowing that's done on DTIs of over five - in other words where the amount borrowed is over five times the annual income of those taking out the mortgage. It's not completely clear what sort of DTI levels the RBNZ would be 'happy' with. And the question of what sort of limits might be imposed if a debt servicing framework is introduced have not yet been explicitly addressed.
If we look at the first home buyers, the debt to income data has shown that in recent times well over half the monthly amounts borrowed by FHBs have been done on DTIs of five or above.
But the September figures show, that nationwide at least, well under half of the borrowing is now being done at DTIs over five.
Auckland FHB figures are still higher but they are dropping.
The debt-to-income data has been gathered and produced by the RBNZ since 2017. It is monthly, but released quarterly. Generally speaking the data between 2017-19 showed a falling trend, from quite high levels, before beginning to rocket. And now the figures are coming down again.
As we've done since the start of this data series we are comparing the latest month's figures (September 2022) with the last month from the previous release (June 2022) and we are also comparing both these with September 2021.
DTIs of above five are regarded as getting up there, so we highlight the percentages of total mortgage money that is borrowed by both first home buyers and other owner occupiers at DTI ratios of above five. Our calculations in both tables here exclude the (small) amount where the DTI size is unknown.
The table below shows the percentage of new mortgage money for first home buyers and other owner-occupiers that is on debt-to-income ratios of over five times:
| Group | Sep 22 | Jun 22 | Sep 21 |
|---|---|---|---|
| FHBs nationwide | 41.4% | 46.9% | 58.3% |
| Auck FHBs | 57.3% | 60.3% | 76.4% |
| Non-Auck FHBs | 27.9% | 34.5% | 47.8% |
| Other owner/occ nationwide | 32.8% | 38.3% | 46.3% |
| Auck other owner/occ | 44.1% | 49.6% | 61.5% |
| Non-Auck other owner/occ | 23.6% | 28.4% | 35.7% |
Okay, that's the FHBs and the owner-occupiers. Then our next table looks at the investor and those owner-occupiers with investment collateral. For this table we choose a more bracing DTI level and look at the percentages of those with debt-to-income ratios of over seven times.
The next table shows the percentage of new mortgage money for both investors and owner occupiers that have investment collateral that is on debt-to-income ratios over seven times:
| Group | Sep 22 | Jun 22 | Sep 21 |
|---|---|---|---|
| Investors nationwide | 12.7% | 16.8% | 37.5% |
| Auck investors | 17.2% | 23.0% | 47.1% |
| Non-Auck investors | 8.6% | 9.9% | 28.7% |
| Owner/occ + investment collateral nationwide | 13.4% | 14.7% | 35.1% |
| Auck owner/occ + investment collateral | 19.4% | 17.7% | 37.2% |
| Non-Auck owner/occ + investment collateral | 9.0% | 12.2% | 32.8% |
So, there we have it. The sharp easing that's been under way for the past 10 months is continuing.
How much further may it go?
Well, we'll be keeping an eye.
23 Comments
Alternatively consider those who bought with a DTI > 7 and are up for refinance at a higher rate. 7%?
At a DTI of 7 and 7% interest rates, 49% of gross income is paying for interest on the loan.
Lower DTI should help protect FHB from future interest rate increases. Imagine taking a loan now at a DTI > 7...
Of course you're better off with a lower DTI. Calculated on a 30 year mortgage:
- $900k mortgage @ 3% & $600k mortgage @ 6.5% = $3792/month
- Get 5% pay rise, increase payments by 5% = $3981 per month.
- $900k mortgage goes from 30 to 28 years.
- $600k mortgage goes from 30 to 27 years.
- Saving of roughly $50k in payments on life of loan just from one increase.
Now of course interest rates are the big variable, just demonstrating in simple terms how the principal size really dictates how quickly you can pay off your mortgage over time. Something the Boomers really struggle to grasp....
Increased wages due to inflation and falling prices from the stupidity of speculation. Worst hit are the retired who still need food but next to no income. The retired all vote, all of the time.
Are the public who consume anything being exploited to bail out the ponzi?
We have a pay-as-you-go tax and spend system. Is that a ponzi?
It requires a stream of new tax earners (or less earners at a higher rate).
Then again any system desiring continuity always needs new entrants, ergo life is a ponzi.
Just as our ancestors had a dozen kids, to put to work to feed the village.
The pension comes up for its inflation adjustment early next year, doesn't it?
But yes, the public have been exploited to feed the ponzi for decades now, and the massive wealth transfer away from wages and savings to assets over the COVID period monetary action was certainly a very generous piece of welfarism for the ponzi.
Check out that 47% of Auckland investor loans with DTI > 7 in 2021.
In September 2021, fully 10% of all new investor lending nationwide was at DTIs of over 9.
That is where the most dangerous rot is. That is the big subprime rotten hunk of concentrated risk right there. If those investor loans start failing, then we will have one of the nastiest property price crashes in history.
And the man who encouraged it all happen on his watch is in charge for 5 mOrr years.
PaTh Of LeAsT rEgReTs.
Around 18% of new lending in 2021. That is excluding the loans that fell into the "other" and "business purposes" categories.
https://www.rbnz.govt.nz/statistics/series/lending-and-monetary/new-res…
There are a lot of rotten apples in the barrel.
24.7% of new mortgages in June 2021 were interest-only
https://mortgagelab.co.nz/investment-mortgages-interest-only/
A whopping 42% of investors who are taking out a new mortgage are taking out an interest-only loan, according to the Reserve Bank of NZ (May 2021 – April 2022).
https://www.opespartners.co.nz/mortgage/interest-only-calculator
What really makes it sub-prime is how the banks, ANZ for example, were testing at 5.8% in June 2021. Only 12 months later, you can't even find a carded rate for less than the test rate.
Oops. The banks with all their wisdom, expertise and profits should have known that interest rates couldn't stay low forever.......or:
by Nzdan | 14th Nov 19, 7:05am
Banks probably want interest rates to rise after a prolonged period of increasing loan book size. A bait and switch of sorts. Get everyone juiced up on low lending rates and then tighten up the vice on the balls.
If they were all forced to shift from interest only to Interest and principle then yes, really bad. From april next year I believe most of the interest is not deductable hence no big tax rebate from negitive gearing. If it does not stack up (push 100 % of debt onto investment while you pay off your own home....) it seems to me the banks dont really have a justification of lending this way.... ie they may not offer any more EVEN if they renew existing, this would mean other investor bids would be way below existing debt levels (mostly were 100%)... thats equally bad. I know a lot of people do not want National to reinstate interest deductability but it may actually help prevent carnage here...... cannot see any property investors voting Labour next election.
DTI is debt overincoe so for an investor with dti of 9 would mean 11.1 percent return,ie borrow 1m getting gross income of 111k
If 11 percent return shouldbe safe for an investors.
But trippiling of interest rates, non deductibility of interest and interest only loans not being renewed will be too much cash flow drain for many investors.
If labour gets re-elected there will be many investors forced to sell.
If they'd implemented DTIs instead of LVRs in the first place, there's a very good chance we wouldn't be in this mess.
They threw FHBs under the bus in favour of specuvestors.
It's somewhat ridiculous that its going to take until 2024 to consider the implementation of DTIs - given they discussed how they decided LVR over DTI back in 2013. Surely it's really not that hard to implement:
DTI = either a ratio {debt}/{income} or an expenditure percentage: {total debt outgoings}/{income}. Either option would work, and really isn't that hard to work out. I believe the latter is what is used in the UK, and sits at either 34 or 43%.
What's preventing its implementation is primarily a lack-of-will. All noises towards it so far have merely been virtue-signalling.
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