The country's first home buyers (FHBs) have just started to push the boat out again slightly when it comes to their borrowing levels.
New figures from the Reserve Bank (RBNZ) show that overall the debt-to-income (DTI) ratios of the FHBs have just increased a little relative to the quite low levels they hit earlier this year - suggesting that the 'low' point of this cycle may have been passed.
Overall, including all categories of new borrower the latest figures show that in June, in terms of DTI ratios the country's borrowers are just about the least geared up they have been since the RBNZ started compiling this detailed information in 2017.
The RBNZ watches closely for loans that are in excess of five times the annual income of the borrower. In its summary of the latest figures, the RBNZ said the monthly share of new mortgage commitments with DTI in excess of five was 33.9% in June 2023, down from 34.4% in March. The lowest share since the data collection began was also recorded this quarter, in May 2023, at 33.3%.
The share has fallen from a recent high of 60.2% in November 2021.
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.
The overall reduction has no doubt been giving the RBNZ considerable comfort as it looks ahead to the possible introduction of DTI limits early next year.
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.
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.
It will be interesting to see what if anything the RBNZ makes of the slight increase in DTI borrowing in excess of five times income by the FHBs in the latest figures. It's worth remembering that the RBNZ relaxed the loan to value ratio (LVR) restrictions from the start of June - and there's definitely been an uptick in borrowing activity from the FHBs since then, from what had already been relatively (compared with a pretty dead market) active levels.
The uptick in the level of higher DTI borrowing by the FHBs is relatively minor, certainly compared with how far the DTI levels have fallen for new borrowers since the peaks of about two years ago. But it will be worth watching to see if this is the start of the levels creeping up again and whether we have now witness the passing of the 'low point' for overall DTI levels.
As we've done since the start of this data series we are comparing the latest month's figures (June 2023) with the last month from the previous release (March 2023) and we are also comparing both these with June 2022 and June 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 | Jun 23 | Mar 23 | Jun 22 | Jun 21 |
|---|---|---|---|---|
| FHBs nationwide | 29.9% | 28.4% | 46.9% | 57.5% |
| Auck FHBs | 43.7% | 41.3% | 60.3% | 71.3% |
| Non-Auck FHBs | 18.8% | 18.3% | 34.5% | 45.7% |
| Other owner/occ nationwide | 23.3% | 22.5% | 38.3% | 44.9% |
| Auck other owner/occ | 33.6% | 29.9% | 49.6% | 57.7% |
| Non-Auck other owner/occ | 14.9% | 16.9% | 28.4% | 34.2% |
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 | Jun 23 | Mar 23 | Jun 22 | Jun 21 |
|---|---|---|---|---|
| Investors nationwide | 9.0% | 10.0% | 16.8% | 36.5% |
| Auck investors | 13.6% | 13.4% | 23.0% | 46.8% |
| Non-Auck investors | 4.5% | 6.6% | 9.9% | 24.4% |
| Owner/occ + investment collateral nationwide | 7.3% | 10.4% | 14.7% | 37.4% |
| Auck owner/occ + investment collateral | 8.7% | 11.8% | 17.7.% | 48.7% |
| Non-Auck owner/occ + investment collateral | 6.3% | 9.3% | 12.2% | 27.7% |
As you can see, the investor figures are still pretty muted and one wonders if they could or would go much lower than this.
We will find out in due course. We'll be keeping an eye on the data as it is released.
25 Comments
DTI is a non-sensical measure, it should be ETI where "E" is expenses, as in loan servicing. DTI is as dumb a measure as if we measured EVR instead of LVR. "I"ncome must be compared to "E"xpenses as they are both cashflow measures and "L"oan must be measured against "V"alue as they are both financial position measures, i.e. what you have vs what you owe.
The critical criteria to assess if a customer can service a loan is if he can afford to pay for the loan, that is an "E"xpense measure, which is absent from LVR and DTI.
Yvil, under your approach, as interest costs (E) goes down then you can afford to borrow more. This is exactly what DTI is trying to correctly prevent.
It’s less about servicing a loan, it’s more about restricting borrowing levels what allow for “normal” fluctuations in interest rates. So Normal families don’t blow up like they are about to.
Funny, that was what the CCCFA covered, and there was a lot of bleating by the financiers about it (though I still hold that it was used as a scapegoat for the affordability inflection that happened when interest rates started to rise again).
As others have noted above - a DTI is only needed when interest rates are at stupidly low levels - higher interest rates act as their own DTI.
Except that Expenses are able to be varied and adjusted at whim. If someone needs to reduce their expenses to afford a mortgage they can easily do so. A person can go from eating at Logan Brown every week to cooking at home. They can take their kids out of private school and enrol them at the local public school. They can cancel the leased BMW and buy a second hand Toyota. The vast majority of consumer spending is purely discretionary - and for those for whom its not (ie. beneficiaries, very low income households) they are not in the market to be homeowners anyway.
I don't think they would just say, "With your income of $120k p.a., we can give you a mortgage of $600k, and with the 20% deposit means you can afford to buy a $750k house".
They will be looking at your last 3 months, 6 months, or a years work of bank statements, and have you fill in a list of incomes and expenses, before making some tightening-the-belt suggestions such as cancelling credit cards, paying off other loans, having a garage sale, etc.
What else do they consider as suitable? Would going through an episode of "East well for less NZ" be enough?
While the majority of my spending is discretionary, it's hardly enough to convince a bank manager that if I stopped that spending I could afford a larger mortgage. I'd already done all that to get the mortgage I have now. Any extra money I end up with in a month is either spent or put in savings for a rainy day.
It is not added to the next mortgage repayment, which is probably where it would have the most financial impact.
Good to see this being talked about finally. To most, its a measure to stop investors exploiting their greater equity and income positions over FHB'ers and single homeowners struggling to own their own shelter. A leverage limiter so to speak. Its is also great for reducing the Too Big to Fail risk Bank's and investors expose the economy when their greed runs unchecked. Accordingly not as dumb as you suggest. Naturally specuvestor's looking to work leverage and tax losses against average kiwis will not be happy.
Those doing so are the minority in NZ. Vote accordingly.
Government and business lobbies expected that flooding the country with cheap migrant workers would solve all our economic woes, including high inflation and sagging house prices.
We're finally starting to realise that a high-cost economy with stagnant productivity like ours running close to full capacity on infrastructure and critical skills can no longer absorb the cost of "cheap" labour. Either we lift productivity/grow our productive capacity to match the cost increases of the past 18 months or learn to live with higher inflation for longer.
Median weekly earnings in NZ from wages and salaries grew by 7.1 percent ($84) over the year
Assuming National/Act get in. We are going to have foreign buys back in, interest deductibility back and FHB restricted by DTI measure.
Home ownership % is going to absolutely tank. Investors are doing to have a massive advantage over a normal couple looking to house their family.
I am genuinely sad for the younger generations (my kids included) that we are turning our backs to preventative measures.
None of the policies are focused on housing supply, just who owns them. Such a shame.
All that foreign capital sloshing around in our domestic economy and an exodus of young workers will stoke inflation once again.
Unless older generations can eat and drink bricks, they will need skilled workers to run our high-cost economy and not many higher-skilled migrants are showing up in the numbers that they used to pre-Covid.
At the first sign of incoherent dribbling (think Biden), the older generations will end up being skuttled off into various Ryman villages after signing off on a reverse mortgage on their home. There they will live out their days being ill-treated by the revolving door of migrant care workers, who themselves are just biding time before they can backdoor their way to Australia.
Devil's advocate here. We don't have much else going for us. Allowing foreign investors to buy up property again will provide much needed foreign investment and keep the creditors at bay for just a little longer. If it buys us another few years then we can deal with reality later.
I am certain that is the stance that Nat-Act will take. That's no different to the current scenario where we're selling government bonds to plug our wide current account gap. This has prevented a downslide of NZD (naturally correcting the export-import imbalance) and the worst part is the government borrowing has not even been put to productive use.
Assuming our dairy export volumes to China remain down in the dumps for several months ahead, unproductive capital inflows into housing will repeat the same currency overvaluation debacle and further dampen returns for the broad export sector while allowing us to consume imports at unsustainable levels.
In short, the crisis we will be dealing in a few years will be horrendously worse.
This is it in a nutshell. People want value for their tax dollars. And people are paying 55% more in income taxes since Labour was elected, while we are receiving a lot less in the way of Govt services for that money. No healthcare, potholed roads, falling education standards, rise in neighbourhood crime, astronomical food prices. So either fix the system for our current taxes (and its unlikely the mob that broke it in the first place is capable of fixing it) or give us our money back so we can afford to fix things ourselves (get private health cover, buy security cameras and a dog, hire a tutor, build a vege garden).
Of course, if NACT can pull off a miracle and both improve services and give us a tax break, all the better. All they have to do is return to how things were done in 2017 when they were last in charge. Fire everyone who has been hired since then (barring front line people who actually deliver stuff).
What's the reasoning behind using a different DTI for the 2 charts? What would the percentages look like for investors and OO+investment if 5 times was used for them?
And I assume DTI is just the how much you borrowed versus how much you earn? So a 500k mortgage on 100k income is a DTI of 5?
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