New mortgage borrowers are this year continuing to take on very much less debt relative to their incomes than has been seen in recent years.
New figures from the Reserve Bank (RBNZ) show that overall the debt-to-income ratios of new borrowers in March 2023 were the lowest since the RBNZ started compiling this information - albeit that this only goes back to 2017.
The RBNZ said that in March, the monthly share of new mortgage commitments for all borrowers with a debt-to-income (DTI) ratio of over five times (that's debt more than five times annual income) was 34.4%, down from 38.8% in December 20221.
The RBNZ said the monthly share of new commitments with DTI of over five is the lowest recorded since the data collection began in June 2017. The share has fallen from a recent high of 60.2% in November 2021.
This reduction will be giving the RBNZ considerable comfort as it looks ahead to the possible introduction of DTI limits early next year.
The detailed DTI figures are compiled monthly, but released quarterly. What the data has shown in the time the RBNZ has been producing it is that DTIs were at quite high levels in 2017, dropped through 2018, started rising again in 2019 and became stratospheric through 2020-21, hitting peak levels in late 2021.
Since then the declines in DTI ratios of new mortgage borrowers have been pretty spectacular. Clearly a number of factors are prompting this trend. House prices have on average reduced by about 17.5% from their late 2021 peaks - so, less money needs to be borrowed. Incomes have increased. But mortgage rates have increased enormously too and this coupled with more conservative lending policies from the banks means it's no longer possible for some would-be homeowners to borrow at the sort of elevated DTI ratios previously seen.
This comes through very clearly in the latest DTI figures produced by the RBZ.
It will be interesting to see how the current declining trend in DTI ratios for new mortgages influences the RBNZ's thoughts on possible implementation of DTI limits.
The RBNZ has wanted to have a DTI tool in its 'macro-prudential toolkit' (a toolkit that already includes the loan to value ratio or LVR limits already in use) since at least 2016. But the RBNZ struggled to secure government support for DTI measures, firstly from the National-led government and then the current Labour government. This was due to concerns about the potential impact on first home buyers.
Having finally received government approval in 2021 the RBNZ then began preparatory work and earlier this year released a debt servicing framework, which will enable restrictions to be possibly brought in by March 2024 if needed - with the banks therefore getting 12 months to get their systems ready, should they be required.
Notably, however, the RBNZ says given the housing market is currently in a downturn, there's no immediate need to implement DTI restrictions.
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.
What would be clear though is that the RBNZ would now be very happy with how the DTI ratios of new borrowers are tracking.
As we've done since the start of this data series we are comparing the latest month's figures (March 2023) with the last month from the previous release (December 2022) and we are also comparing both these with March 2022 - and this time as a treat we've added an extra column to our tables so you may also compare the two-years-ago figures from March 2021.
As ever, we've got two tables for you with the first one (immediately below) showing the figures for first home buyers (FHBs) and other owner occupiers, while the second table looks at figures for investors and owner-occupiers who have investment property collateral.
So, as for the first table immediately below, 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. Please note that our calculations 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 | Mar 23 | Dec 22 | Mar 22 | Mar 21 |
|---|---|---|---|---|
| FHBs nationwide | 28.4% | 35.2% | 53.9% | 53.5% |
| Auck FHBs | 41.3% | 49.6% | 67.7% | 67.7% |
| Non-Auck FHBs | 18.3% | 23.8% | 41.9% | 41.7% |
| Other owner/occ nationwide | 22.5% | 26.5% | 44.1% | 45.4% |
| Auck other owner/occ | 29.9% | 37.3% | 57.2% | 60.6% |
| Non-Auck other owner/occ | 16.9% | 18.6% | 34.2% | 33.4% |
So, some pretty substantial falls evident there.
That's the FHBs and the owner-occupiers. Our second 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. Again our calculations exclude the (small) amount of mortgage money where the DTI size is not known.
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 | Mar 23 | Dec 22 | Mar 22 | Mar 21 |
|---|---|---|---|---|
| Investors nationwide | 10.0% | 11.7% | 26.4% | 36.5% |
| Auck investors | 13.4% | 16.4% | 35.7% | 48.3% |
| Non-Auck investors | 6.6% | 6.7% | 18.1% | 25.2% |
| Owner/occ + investment collateral nationwide | 10.4% | 8.3% | 26.2% | 33.7% |
| Auck owner/occ + investment collateral | 11.8% | 6.8% | 34.8% | 43.0% |
| Non-Auck owner/occ + investment collateral | 9.3% | 9.6% | 19.1% | 25.4% |
So, there again we have it.
How much lower can they go? Or are we going to see upward movement again? It is interesting to see that some of the owner-occupier with investment collateral figures have blipped up a little - but from fairly low levels.
We'll be keeping an eye on the data as it is released.
131 Comments
I think the RBNZ will wait until prices stop falling before implementing DTI. Don't expect a quick recovery, it will be more an "L" when we get there. If anybody wants to know how much farther they will fall? Don't ask Tony, ask Treasury. The words "crash" and "crashing" are now being used to describe the current down trend.
FYI, from Tony Alexander:
What about house prices? It is predicting that after falling some 13.4% between the June quarter of 2022 and the June quarter of this year (now), there will be another decline of 4.6% next year. I disagree. Chances are prices will rise between 5% and 10% in the coming year because of the migration boom, the two-year build up of buyers waiting for prices to bottom out, the coming decline in construction, and the labour market remaining tight.
https://www.oneroof.co.nz/news/tony-alexander-why-treasurys-predictions…
Terrible reasoning from The Comb. Really bad even by his declining standards.
More specifically:
- 2 year build up of buyers? Why has the build up occurred Tony? You guessed it, interest rates!!! Are said interest rates going down significantly, soon, Mr Alexander?
- Construction slump? Yep it’s coming as I predicted. But we have a stack-load of completions coming in the next few months that will bolster supply. The house price implications of a slump in construction is a story for mid 2024 onwards
- Labour market tight? How does that square with a construction slump, given construction is of such significance to the domestic economy? Where’s your internal consistency, Tony?
I have dealt with the migration aspect many times recently.
FYI, here is what he was saying at the peak in Nov 2021:
"The supporting factors include a very strong labour market with accelerating wages growth, rising construction costs, high inflation expectations, and banks eventually coming to grips with CCCFA rules, the new LVR regime, and application of DTIs (debt to income restrictions."
https://www.oneroof.co.nz/news/tony-alexander-panic-buyings-over-but-he…
"it still looks like too strong a call to suggest that average house prices will fall."
https://www.squirrel.co.nz/blogs/housing-market/house-price-growth-to-f…
For the record, from Tony Alexander on Dec 2, 2021
19 reasons why there’s no crash.
https://ndhadeliver.natlib.govt.nz/delivery/DeliveryManagerServlet?dps_…
Note the advertisers in his report ...
Who is going to pay him if he doesn't encourage people to buy? That is what his sponsors require from him. To encourage people to buy - regardless of whether it is a beneficial transaction for the individual - only whether it is a money making event for the group paying his bills.
Local central SI agent’s newsletter just popped into my mailbox exclaiming:
“The vibe for buying has returned with several unconditional offers being made and also being accepted. This has been very exciting for our property owners to see this, as prior there has been so much negativity from the media, with not a lot of movement from buyers.
We feel the tables are turning and the market will start to climb. Which is perfect timing to lead into spring later in the year”
What he doesn't account for is that property investors are losing equity so many won't be in a position to buy more properties? This added significant additional demand in a rising market...but with prices down 20%, where are they going to generate their 40% deposit for their next rental - especially if their cash flows are marginal on their current portfolios?
Sure if you're sitting on hundreds of thousands of dollars...great - go and buy. But why would you buy now giving the yields/cash flows? They don't add up. You'd be better parking your money in a Term deposit for a year or two and seeing where the bottom of the market is - which is likely at a point when the cash flows do add up.
Non owner occupier buyers are willing to go into negative cashflow property investments in expectation of capital gains - particularly in the off the plan market.
Have seen a number of property investment calculations which require top ups (i.e. cash injection by the owner as the revenues from the property does not meet the costs). For each property, these top ups can be up to $400 - $500 per week ($20,000 - $25,000 per year - think abut how much gross before tax income is required to maintain that). Some larger property investors may have surplus cashflow from other properties in their portfolio to be able to finance those top ups, however for property investors with 1-3 properties, this may need to come out of the household budget (and could be a significant chunk of their household income).
For many, those expected future capital gains are based on extrapolation of long term historical house price growth.
A) "If Tony is wrong, it's only on timing"
There are going to be people who purchased in 2020-2021 who:
1) based on current market valuations, have lost a lot of their equity deposit (may even be in negative equity)
2) will experience a large increase in their debt service payments
Some may be unable to meet the large increase in debt service payments, come under cashflow pressure and are unable to hold on. They may be under pressure to sell and realise those losses in their equity (some may even still owe money to their lender after the house is sold due to their negative equity position). These highly leveraged owner occupier buyers are going to be collateral damage.
B) so when is the right timing?
Best person to ask is Tony Alexander.
Here is one such example.
Vendor sells house in Auckland for 43% below their purchase price.
"A four-bedroom home in South Auckland that was bought just over a year ago for $2.3 million sold yesterday for $1.305m - representing a near-$1m loss for the vendors."
https://www.oneroof.co.nz/news/43109
If the vendor had an 80% LVR mortgage to finance their purchase price of 2.3mn, then they would be in negative equity and still owe money to their lender after the sale proceeds.
A) Purchase
Purchase price: 2,300,000
80% mortgage: 1,840,000
Equity: 460,000
B) Sale
Sales price: 1,305,000
Net sales proceeds after 3% sales commission: 1,265,850
Mortgage: 1,840,000
Equity: NEGATIVE 574,150
$ change in equity value: LOSS of 1,034,150
% change in equity value: NEGATIVE 224%
Invest: 460,000
Return: still owe 574,150 to lender.
I think the tight labour market has got to be one of his most frustrating talking points for me - using the current state of the labour market to discuss the future state of the housing market, while burying your head in the sand about how the former is going to unfold.
Adrian Orr has said he believes unemployment is above it's maximum sustainable level, which is contributing towards inflation. He's been pretty explicit about the fact that he wants unemployment to rise.
So tell me Tony, if a strong labour market is one of the key reasons why house prices can't slide further, what happens when the labour market shits the bed?
For the record.
The above comment in OneRoof was published on 18 May 2023.
Here is what Tony Alexander said on the 15 May 2023 (3 days before)
Q: Are we at the bottom yet?
TA: No I don't think so
While DTI limits are a good start, they are only really applicable at the time that the money is borrowed, and don't account for the sorts of interest rate changes we've seen over the past 3 years.
Our DTI after buying our first home in 2020 was 21%. Now it's 35%. We've not taken on more debt, just the debt we have now costs more to service.
Also, don't banks and non-bank lenders look at your assets for any that could be liquidated in the event you fail to meet your repayment obligations, and include those in their decision to lend to you or not?
So even if your DTI was 40%, they might still lend, and you end up with 50% DTI. Interest rates increase by 1% and it's now 70% DTI, which is untenable.
No. I am referring to Debt to Income ratio, as per the Debt to Income (DTI) Calculator on this site that uses Monthly Debt Payments and Monthly Gross Income, so when our monthly debt payments increased due to higher interest rates on our mortgage, our DTI changed.
However, that calculator gives me a percentage, while the report uses a number between 3 and 7... Are there 2 different DTI calculations? Or is the number just the percentage divided by 10? So we went from 2.1 to 3.5?
Thank you for your clarification. Understand you now. There are 2 entirely different numbers.
A) debt to income calculator on interest.co.nz
Calculator here: https://www.interest.co.nz/calculators/debt-income-ratio-calculator
The calculator above calculates ratio of the monthly debt payments to the monthly income - this represents the percentage of a person's income that is spent on debt payments.
So in your case, this went from 21% of your income to 35% of your income mainly due to rising mortgage payments.
This is also referred to as the debt service ratio.
B) Debt to income ratio as defined by the RBNZ
The Debt to Income ratio referred to in this article refers to total household debt divided by total household income
Refer this definition by the RBNZ - https://www.rbnz.govt.nz/hub/news/2021/08/reserve-bank-considers-tighte…
What is a debt to income ratio or DTI?
The DTI ratio is calculated by dividing the total debt of a borrower by their gross income. The DTI ratio is a useful measure of mortgage serviceability for owner-occupiers.
More explanation on the RBNZ's Debt to income ratio can be obtained here:
https://www.rbnz.govt.nz/hub/-/media/project/sites/rbnz/files/statistic…
Here is the reason the RBNZ monitors the debt to income ratio:
DTI data informs financial stability risks
The Reserve Bank developed the DTI survey to better understand risks to financial stability. We collect data on the value and number of new mortgages, total borrower debt and gross income.
- The DTI ratio is calculated by dividing the total debt of a borrower by their gross income.
- The DTI ratio is a useful measure of mortgage serviceability for owner occupiers. All else equal, a borrower with a higher DTI ratio would have a smaller buffer to withstand an adverse shock to their serviceability, for example a partial loss of income or higher interest rates.
- Higher serviceability risk increases the likelihood of credit losses for banks in an economic downturn.
- Higher-DTI households also tend to reduce their consumption in response to shocks, even if they can still service their mortgage. Reducing spending could create stress for individual households and impact the wider economy
Thanks CN. That's certainly shed some light on my confusion. But what bright spark decided to have 2 different DTI numbers?
So our DTI when we bought the house was 4.3 and now it's 3.6.
You know. That makes me feel better, even if I'm having to pay more per month to service the debt.
Auckland FHB still taking so much of debt. They are getting paid more too relative to other parts of the country but I don't understand their logic to take so much debt. Auckland is still an old village compared to cities across the ditch.
My best guess would be the immigrants taking on so much debt since they came from worse places, so Auckland is a heaven for them.
I guess these days I throw a stone ( not literally) in Auckland and I am 90% sure it will fall on someone with an Asian name who immigrated within the last 20-25 years.
by Iceman | 19th May 23, 9:20am 1684444836
The same immigrants who fill skill shortages and probably contribute a lot more in tax than some people who grew up here and live off the dole.
Least we forgot the years that property investors went about using property losses to reduce their personal tax bill in order to contribute less tax than those who didn't own investment properties. Should property investors have the same access to public infrastructure given that the spent so much time and effort with their accountants trying to avoid paying taxes and contribute funding for our public facilities? Or should the people who didn't own investment property and paid more taxes over this time have higher access rights?
I take it you understand that’s how it works when you run a business? Except in the naive eyes of the labour government. Also, most property investors also have high paying 9-5 jobs, which supports serviceability, and the aforementioned contributions towards tax. Most people choose not to acknowledge the latter.
"most property investors also have high paying 9-5 jobs, which supports serviceability"
Yes, you are absolutely right.
The issue however is that these borrowers may have been tested on mortgage stress test rates of 5.8% in 2020 - 2021 (vs current 1 year mortgage interest rates of 6.7% - potential cashflow stress when the borrower renews their interest rate?).
"I take it you understand that’s how it works when you run a business?"
Negatively geared property was the only business that I know that was designed to lose money every year and never produce a profit (on purpose)!
"Also, most property investors also have high paying 9-5 job"
Oddly most of the highly paid people I've met down want to touch property investment/landlording because they have better things to do with their time than to deal with hassles that come from rental properties/tenants and they are also smart enough to see that the cash flows don't add up.
In my experience it is the people who are desperate because they believe their income from wages isn't going to be enough to retire on who have got into the property investment game (i.e. they've been gambling with leverage/debt with the hope that prices continue to rise).
by Iceman | 19th May 23, 12:42pm 1684456940
That’s very interesting the “wealthy” people you know don’t want to touch property. Most successful investors globally must be out of their minds then I suppose.
investing in Real Estate over a period of time is right up there incase you’ve missed the memo.
I agree - property investment is a good option most of the time. But when it goes wrong, it really goes wrong (because it is so leveraged).
The smart ones I know who made a lot of money have sold. As the song goes......
You got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
This is a great read if you ever wish to broaden your thinking - beyond housing being a one way bet. A whole section to housing booms and busts to help you know when a good time is to hold and when a good time might be to fold (same deal with shares and bonds).
Irrational Exuberance 3rd edition: Shiller, Robert J.: 9780691166261: Amazon.com: Books
Heard a story the other day about a retiree that was looking to buy a dwelling in a retirement village. The sales price was 1.3 million.
The issue was that the retiree was unable to afford that price as the sales proceeds from their current house would now not be anywhere near that amount.
This is the potential knock on effect of lower house prices on selling prices for dwellings in retirement communities.
Don't hate the player, hate the game. Those involved in negative geared property investment were just responding rationally to the incentives in place at the time.
Then Working for Families made the whole thing worse, as income earners with a young family could negative gear their way down to maximum tax credits there as well by taking on huge interest only loans.
The problem here is not property investors avoiding paying taxes, it's a tax and fiscal policy structure set up to incentivise non-productive investment, with monetary policy supplying excess liquidity.
So basically people should just want the gains but not the pains?
i.e. I want to be a greedy property investor and turn my neighbour into my rent slave so that I can make millions of dollars and push more people towards poverty...but if my actions cause the country to turn into a hell hole as a result, it is not my problem...I'm just playing by the rules.
This is why we are in this mess in the first place! Because nobody wants to take personal responsibility for the collective good - those who are 'playing the game' are just focused on their own selfish financial interests! And that is dangerous because it means we eventually turn against one another when the going gets tough. And that is the end game of the system you talk about above.
We have created a system where people are trying push others down in order to elevate themselves....this is very bad and dangerous for our financial and social stability. If we could each change a little and think more about what is going to be the right thing to do by the collective good, as opposed to what is going to make me a quick profit in the short term, then we are going to be in a far better place as a nation. We can improve one another's lot as opposed to making a few people very wealthy while more and more suffer at their expense.
(and by no means am I advocating for socialism by referring to the collective good. I'm talking about a system of capitalisim that improves the lot for everyone as opposed to just the top 5, 10 - 20% of the population at the expense of the middle/lower class earners - remembering that in the western world, our wealth inequality is now as bad as it was in the 1920's, a period of excess for the wealthy/inequality that resulted in the great depression).
"But the RBNZ struggled to secure government support for DTI measures, firstly from the National-led government and then the current Labour government. This was due to concerns about the potential impact on first home buyers. "
The first home buyers and other owner occupier buyers who borrowed at high debt to income levels in 2020 - 2021 are at higher risk of becoming collateral damage. The high house price risks of 2020 - 2021 would have been preventable if debt to income macro-prudential measures requested by the RBNZ had been allowed by the then Finance Minister in 2016.
If a debt to income ratio of 5 was imposed back in 2017, then a significant amount of lending would not have been made (and house prices would have been less likely to have reached their record levels).
Based on RBNZ data, the lending commitments made by banks in 2021, that were on a debt to income of 5 or above were NZ$58.8bn (about 59% of total lending commitments made in 2021). For the period of 2019-2022, total loan commitments on a debt to income of 5 or above totalled NZ$99.8bn (about 32% of the total loan commitments for that period)
https://www.rbnz.govt.nz/.../residential-mortgage-lending...
The higher the debt to income ratio for a borrower, then the higher the probability of default.
Now how many of these borrowers will experience significant cashflow stress, or default?
For some mortgages, the banks will allow some mortgage modification (such as extension of loan maturity date, or allow the borrower to go on interest only)
For other mortgages, the banks may require the borrower to sell the property. This will a key factor in determining the magnitude of house price falls.
Remember, that unemployment is currently low. What will happen when unemployment rises? How many more borrowers will be under cashflow stress?
According to Centrix, that as at March 2023, there were 19,300 borrowers in mortgage arrears.
Well the narrative is that young people in their 20's or early 30's should have known interest rates couldn't stay low forever. Nobody is forcing them to take on such large mortgages. Please think of the banks for a moment, they're innocent collateral in this too.
"Nobody is forcing them to take on such large mortgages."
Absolutely.
However due to the vested financial self serving interests, the owner occupier buyers were not fully informed of the high house price risks.
The repeated messages in the media from those with vested financial self serving interests drowned out the few warnings given on house price risks.
Since many owner occupier buyers may not have been informed, many may not have made a fully informed decision - many did not know what they did not know. Many highly leveraged owner occupier borrowers of 2020 -2021 are now at risk of being collateral damage.
There was a warning in March 2021 by the RBNZ. If owner occupier buyers chose to ignore this warning and still chose to buy, then they face the potential consequences of their choice to buy.
People are free to choose, but they are not free from the consequences of their choice.
This potential owner occupier buyer was turned down for a mortgage at peak house prices in November 2021.
Little did he know at the time that this was actually a blessing in disguise which likely saved him from losing his deposit (by avoiding taking on a high level of debt, avoid potentially facing a large increase in debt service payments and avoiding potential cashflow stress as well as mental stress).
The bank stopped this guy from being a buyer at the peak.
Would be interested in seeing Newshub do a follow up report with this guy in light of the house price falls since Nov 2021.
https://www.newshub.co.nz/home/money/2021/11/first-home-buyer-not-very-…
If debt to income restrictions had been implemented back in 2016 / 2017, there would have been far less collateral damage.
How many highly leveraged owners will be unable to hold on in the next few years?
https://www.oneroof.co.nz/news/latest-news/interest-rate-pain-banks-urg…
This was due to concerns about the potential impact on first home buyer
And was a blatant lie. I watched Simon Bridges talking up the introduction of LVRs as benefitting FHBs, knowing full well that it was going to tilt the market towards investors with rising paper equity.
A DTI was always going to disadvantage investors dependent on rental income to pay for their mortgages, which is why the landlords in parliament didn't want to implement it.
The OCR will probably go up further, we are in a global staglationary environment caused by excess debt and malinvestment. It will take a decade at least to work it out of the system. A large enough portion of the debt has to be paid down or written off over time before the cycle can restart. It can only be paid back at the rate of actual earnings, extend and pretend is broken. Entities with index linked earnings have nothing to worry about though.
I think you're right Zwifter. I reckon, and this is just my uneducated opinion, that something like the double recession we had in the late 70s, early 80s will happen, except this time it'll be house prices where there will be a significant drop in houses, as we are seeing, and once inflation eases and the OCR remains steady people will think things will be ok and house prices will rise temporarily before another economic shock and house prices fall again before flattening out for a few years.
From a financial stability perspective, a small amount of new lending at high debt to income does not significantly increase the risk of financial stability.
The financial stability risks increase when there is a combination of the following factors:
1) there is a large amount of new mortgage lending at a high debt to income ratio
2) a significant amount of new mortgage lending is at high LVR levels which could mean larger losses for highly leveraged lenders in the event of a mortgagee sale,
3) the underlying house prices are at high price risk levels.
4) a large number of borrowers are facing large increases in debt service payments
5) unemployment rises
The vulnerabilities to the financial system have been built up in the last 5 - 10 years.
Now all was needed was cashflow stress on highly indebted borrowers:
4) a large number of borrowers are facing large increases in debt service payments
The cashflow pressure for highly indebted borrowers increases when they renew their mortgage interest rates (since July 2021 with the rapid increases in 1 year mortgage interest rates going from 2.17% to 6.683%)
5) unemployment rises
Yet to come.
That would likely reduce house prices (and make them affordable for owner occupier buyers), even if there was:
1) a migration boom,
2) the two-year build up of buyers waiting for prices to bottom out,
3) the coming decline in construction, and
4) the labour market remaining tight
Would also likely reduce:
1) the numbers on waiting lists for social housing,
2) the housing supplements paid by the government to renters who are renting in the private sector
3) land prices - sections and raw land
"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."
From RBNZ Framework for Restrictions on High Debt-To Income Residential Mortgage Lending - 3 April 2023
Appendix 2: Illustrative example of calculation of DTI restrictions
The following is an example of how DTI restrictions would apply in a particular case. This example is not calibrated to the actual requirements but is for explanatory purposes. Assume that the condition of registration is specified as such:
(1) That, for a debt-to-income measurement period, the total of the registered bank’s qualifying new mortgage lending amount in respect of property-investment residential mortgage loans with a DTI ratio of more than 6, must not exceed 15% of the total of the qualifying new mortgage lending amount in respect of property-investment residential mortgage loans arising in the debt-to-income measurement period.
(2) That, for a debt-to-income measurement period, the total of the registered bank’s qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans with a DTI ratio of more than 6, must not exceed 15% of the total of the qualifying new mortgage lending amount in respect of non property-investment residential mortgage loans arising in the debt-to-income measurement period.
Time period: the three calendar months from 1 February 2023 to 30 April 2023 inclusive
https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations…
Any DTI's must also have a duration consideration as well.
There's no point granting a 64-year-old a 30-year mortgage at a DTI of 4 that fits any non-discriminatory formula, if they are due to have their primarily income retired in a years time (an exaggerated example of course).
Some sort of maximum term/age should also come in with any DTI. Mortgages should be granted on the basis of full discharge by the age of retirement. The closer you get, the less time you have to complete that. It will have a big bearing on the age imbalance between the young getting a home and the ageing having less capacity to 'leverage up' what they already have to compete against them.
DTI isnt the be all and end all of tools. Do they calculate it on your Gross or your Net income?
Eg, if your a solo earner on $80k then a DTI of 5 is only $400K with a 100k deposit thats only a 500k house. And we all know there is very limited properties in that range, especially in the big cities.
Another addition is that a lot of FHB get flat mates in. So based on their current income that will be a higher DTI, but once they actually get that cash flow it will reduce their DTI but that is only after the initial purchase.
For me, if it was on Gross my DRI was ~7.3 before flatmates and ~5.3 with flat mates.
If it was on my Net then it is up around 10 (~7.5 inc flatmates).
But once you have the debt it all comes down to cash flow and servicing the loan.
My understanding is that the lenders include income from other sources such as flatmates and boarders. So in your scenario, the debt to income would be 5.3x.
To increase borrowing power and to finance the purchase of residential dwellings, there have been reports of mortgage brokers suggesting to mortgage applicants that they claim rental income from NON EXISTENT boarders.(i.e. potential mortgage fraud). There are no statistics on how prevalent this practice is.
Don't really understand DTI. Some people think its going to be some sort of magic wand in bringing down house prices back down to the good old days of 3x income. Reality is its not changing what your earn and if its set at some magic number, all it will do is cut you out of the market completely. Its just a way for banks to protect themselves and for you to reduce your expectations and not get into stupid levels of debt.
If everyone is capped at a DTI of 3 for example then the market will have to adjust or go bust. It's as simple as that.
For example, a couple earning $120k per year can borrow $360k for a $450k house. Or a Landlord seeking to charge $600 per week can borrow $93k. Maybe investors will invest their own money for a change....wait....are you telling me these aspiring landlords don't actually have cash?
The thing is, what's stopping a house that's 40 years old that cost $100k to build selling for $300k? No different to a 30 year old 4 door car selling for $5k but a brand new one $50k.
With house prices falling, there will be some borrowers who were recycling equity who now have less equity to recycle and some may now be above maximum LVR limits.
Under certain circumstances, some may be asked by lenders to reduce their debt to maximum LVR limits.
Yip was reading on the FB propety investor page today that one individuals accountant had told the individual they needed to reduce debt and sell one of their rentals. So they are now going to list their property.
Imagine this is going to be representative of many who overextended themselves and are in a similar situation.
Could be even more supply going to come to market - but the question will be....where are the credit worthy buyers to purchse these properties from the overindebted property investors?
Many property market promoters with their vested financial self serving interests are focused on highlighting the factors of increasing effective demand to persuade buyers to buy (so that those with the vested self serving interests can maintain or increase their income).
The imbalance could potentially come from the magnitude of the increase in effective supply.
Pointless argument, the banks are never going to get it capped at 3. You are looking at a cap of like 7+ and that's if it ever gets off the ground in the first place, which is why everyone is dragging their heals and its delay delay because its a pointless exercise now and should have been put in place 20 years ago if you wanted it to have an effect, the horse has already bolted.
What if the investor has a mortgage on their home? At the end of the day, it becomes a diminishing outcome.
$150k Salary. 1 rental at 7 DTI making $30k p.a. ($210k mrtge) and a mrtge free home. They can borrow $150k x 7 = $1.05m. So they take out 2 x $525k mortgages and buy 2 x $875k houses. At 4% gross they return $35k p.a. each.
Income: $150k + $30k + ($35k x 2) = $250k . Mortgages: $1050 + $210k = $1.26m. DTI: $250k x 7 = $1.75m. So they can still borrow $490k.
$490k loan @ 60% LVR = $816k property @ 4% = $32k p.a.
Income: $150k + $30k + ($35k x 2) + $32k = $282k. Mortgages: $1050 + $210k + $490k = $1.75m DTI: $282k x 7 = $1.97m. Now they can borrow $222k.
Example House worth $1m, rented for $700pw, x52 weeks (assume 100% occupancy), x dti of 5x, means debt can only be $182k. Equity required is thus $818k. Accordingly what it means, at current house prices, is specuvestor's are going to either. a) transition to equity of 80% or there about, or b) increase rents by a massive amount.
If you had been paying down debt and were high equity no big deal. If you were playing the interest only game...expect an ugly call from the bank.
"Another addition is that a lot of FHB get flat mates in"
If this is done to a level that actually impacts the market (which appears to be your argument), that would also reduce demand for rentals - dropping the collective cash flow for property investors, making their cash flows look even worse. So who would be buying the houses that the landlords might have done so otherwise if all these FHBs are taking their cash flows away from them?
If our population declines everything is going to be a bad investment! Hence the desperation with out immigration policies (but then again same with Canada and Australia who are both in the same predicament as we are - retiring and dying boomer generations who were the backbone of our economy)
The banks are a little fussier than that now (for example, we were told if we moved to a cheaper location and one of us worked FIFO - which we have done before - then that person's income couldn't be used on the affordability calculator). The banks love to quote 'job security' as a reason for their decisions - when in reality they just don't want to lend on cheaper property.
But you're right, a DTI isn't the be-all-end-all. I still feel it is necessary to point out that DTIs are only needed if the effective DTI from low interest rates gets too high.
At a DTI of 6 (the example used in the RBNZ discussion document) on a dual median income of 2x$55k, a typical FHB on 7.5% (current rate) pays 64% of their after tax income on the mortgage alone. That rate goes up as the income goes up (due to interest), with a lower income having a slightly lower percentage due to less tax taken from the salary/wages, vs higher income purchasers losing more via tax take.
I would be surprised if too many people were trying to take DTIs over 7 at the current interest rates (and the stats show that) - you need a very high income to keep making ends meet if you're committing that high a percentage of your after-tax income into mortgage payments.
Correct, the stress test is really a DTI anyway. Just stick to a calculation that determines whether you can repay what your borrowing with allowance for mortgage rates to rise. 10% is looking about right now the way things are trending. The banks are essentially already doing a DTI when you go to borrow money, they tell you the limit.
"Just stick to a calculation that determines whether you can repay what your borrowing with allowance for mortgage rates to rise."
2 years ago when mortgage interest rates were in the 2.5-3.0% range, most highly leveraged buyers (especially owner occupier buyers) did not think that mortgage interest rates of 6.75% were even in the realm of possibilities. Even some banks didn't think that they would get that high with their mortgage stress test interest rates of 5.8%.
Some property investment calculations back then assumed 4.0 - 4.5% mortgage interest rates as a worst case scenario.
How many highly leveraged borrowers from 2020 - 2021 are going to be unable to hold on?
I talked 3 people out of infill housing this week. They were going to buy and add, but didn't want to subdivide as that's an extra 6 figures in cost for no cashflow increase if you are holding the properties . The cost to build, cost of money, and lack of interest deductibility on the original house killed all 3 deals and it wasn't even particularly close. Suggested they just pay off their mortgages and chill.
Which goes a long way to explaining why I've had calls from builders looking for JV partners to build for KO. They're now the only buyer in town and the numbers don't need to make sense.
They're now the only buyer in town and the numbers don't need to make sense.
Developers must know what is coming and are trying to lock in KO contracts under the current government ASAP to tide them through the downturn with some guaranteed work that'll get them to the next upswing.
"Kāinga Ora, for example, revealed in a Cabinet paper from June last year that it had suspended plans to add net extra social housing after the middle of next year because it was unfunded. It quietly decided that it would sell its new builds into the private market after 2024 and had reversed plans for ‘whole of house’ heating and had stopped retro-fitting existing state houses for people with disabilities to save money."
https://thekaka.substack.com/p/the-fire-fueled-by-our-housing-and?utm_s…
I have been saying for quite a while that KO and Megan Woods are basket cases. I have also been saying that KO’s development model is fundamentally f%#^ed, as it relies so heavily on private market housing, and that when the slump happens what happens to the model?
Of course I am mostly ignored. Especially from Megan and her most inglorious bureaucrats. But I am being proven 100% correct.
new mortgage borrowers stretching themselves much less than has been seen in recent years in regards to the amount of debt they're taking on relative to income
This is so obvious due to higher mortgage rates, it's a bit like coming to the realisation that ice is colder than water.
RBNZ must enforce a DTI of 1:1. It means if your I come is 60k, you only allow borrow 60k. 1:1 DIT and 20% OCR should enough to collapse entire New Zealand finance system to bring inflation down. Make sure we are alway under huge deflation and no any money creation.
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