We could be excused for wondering why the Reserve Bank has just gone through a years-long battle to implement a policy that will have negligible effect.
But that would be over-simplifying things.
The RBNZ's announcement that it plans to implement a debt-to-income (DTI) measure as part of its 'macro-prudential policy kit' later this year - but at a level that won't be 'binding' - is the culmination of a battle the central bank has been waging since about 2016.
And it's a battle that wouldn't have been necessary if the RBNZ had not, inexplicably, decided it would not seek to include a DTI instrument in its macropru toolkit when this was being agreed to with then Finance Minister Bill English in 2013. It seems likely that a DTI measure would have been agreed to at that time had the RBNZ gone for it.
But it didn't and I suppose after the National Government had a bit of a look at the kind of impact and some ructions caused by the loan to value ratio (LVR) restrictions that WERE slipped into the macropru arsenal, and were of course implemented from 2013 onward, it got rather cold feet and pushed back at the RBNZ's subsequent suggestions that it really would rather like DTIs after all.
So, then of course, Labour didn't fancy them either once it got into Government and it was not till 2021 that the RBNZ was finally able to squeeze then Finance Minister Grant Robertson's arm behind his back and get, it seemed, very reticent, approval.
And since then the RBNZ's moved very slowly and is now ready to, finally load DTIs into the system. But they won't have any impact.
Pointless? No. This won't matter to the RBNZ, because it's finally got what it wanted.
The RBNZ can't implement macropru measures that are not included in its Memorandum of Understanding with the Finance Minister. That's the important thing to remember.
But once a measure is in there it can be implemented without Government approval. And of course it can be changed - to be more strict or more loose as needs determine. Which is the important bit.
When the New Zealand housing market gets hot again - and as night follows day, it will, because that's what happens in NZ - then the RBNZ can turn up the heat with the DTIs.
We really could have done with DTIs being in place some years back when interest rates were virtually non existent and therefore anybody could at a pinch service a loan on an absolute truckload of money. That is most certainly not the case today. At the moment the high interest rates effectively make a DTI policy redundant.
The most recent DTI mortgage figures from the RBNZ showed that the DTI ratios have continued to fall since hitting very high levels in 2021 at the peak of the pandemic housing frenzy.
Whether DTIs could have saved some people from themselves during the 2020-21 frenzy is something we can speculate over. It is fair to say that at this stage anyway RBNZ-compiled figures would suggest that mortgage delinquencies are up, but not at extreme levels.
What about in future then?
That housing market will, as mentioned earlier, take off again at some stage. It's an inevitable consequence of New Zealand's property-driven mentality.
What the Government's reaction might be if the RBNZ does start to squeeze hard on those DTI ratios - IE with much lower limits than will be initially implemented - will be interesting.
The first home buyers will be the crucial factor - and this time the RBNZ might have them covered off rather better than it has in the past.
When the LVR limits were first implemented way back in 2013 they were introduced with a blanket limit for all categories of borrower. The first home buyers complained that they were disadvantaged. The RBNZ itself much later conceded that the initial iteration of the LVRs had "disproportionately restricted" purchases by FHBs.
I would argue that the LVRs properly came into their own once the extra restrictions were piled on to investors in mid-2016. At the time this appeared a somewhat desperate and panicky move by a central bank that was watching the housing market blaze away. But it worked. And we still have the two-tier restrictions in place to this day.
So, crucially the DTIs have been developed with a similar two-tier system. If the RBNZ reckons investors are really starting to drive up prices it can ramp up the DTI limits they face.
For the FHBs, I reckon it will be largely hands-off. The current Memorandum of Understanding with the Finance Minister from back in 2021 states that "in the design and implementation of a debt serviceability restriction, the Bank [RBNZ] will have regard to avoiding negative impacts, as much as possible, on first home buyers..."
I'm sure this Government, like other governments before it, will be thoroughly cognisant of the extremely toxic impact of televised images of young couples, babe in arms, pictured in front of homes they can't buy.
Whether there's much the Government could do to stop the RBNZ if it wants to ramp up DTI settings is an interesting point. In reality, it would appear not - not without renegotiating the whole Memorandum of Understanding.
But I reckon as long as the FHBs are protected from the worst impacts of any DTI restrictions (and we can debate whether that's necessarily a good thing or not), the Government's not going to have much to complain about.
For the moment much of this talk is redundant. While interest rates remain at current levels the banks' debt serviceability tests are doing the job in ensuring that people can't overload themselves.
The key thing to watch is once interest rates start to come down again.
But how far down will interest rates go?
It's the subject for potentially a fairly strenuous debate, but my feeling is that the super, super low interest rates we saw in recent years won't be repeated.
Therefore the DTIs are never likely to come into their own again in quite the same way they could have during that low interest rate regime.
Well done to the RBNZ for sheer dogged perseverance, but I do wonder if DTIs can ever be quite as effective again as they might have been some years ago.
And that thought leads me to say that I hope there's no resting on laurels here for the RBNZ in terms of finally getting the long sought measure in place.
The world changes all the time. What is a good method of dealing with something one year might be thoroughly out of date by even the next year.
What I mean is that it would be a mistake if the RBNZ thinks it has now 'made it' and has its macropru kit complete and ready for all contingencies.
The RBNZ needs to remain alert to the possibility that in future their may be better things than DTIs to do the job of preserving financial stability.
And it would not want to miss the bus with those because it has been distracted by the length of time it took to get DTIs in place.
I genuinely hope the DTIs do prove useful given the amount of effort it took to get them in place.
But I do wonder if the best time to have had them has already been and gone.
43 Comments
Well haven't they? Those who bought 2022 have taken a hit but they seem to be absorbing it. We are hardly seeing a wave of mortgagee sales like we did in 2008.
I am all for LVRs. It protects us all from needing to bail out over greedy banks. But DTIs areas exercise in identifying the least worst victim. The people most affected by DTIs are households with low incomes. Many of them are in the protected prospective FHB species.
"Those who bought 2022 have taken a hit but they seem to be absorbing it. We are hardly seeing a wave of mortgagee sales like we did in 2008."
Mortgagee sales are a lagging indicator. Other indicators show an increase in the number of households under cashflow stress.
Not so.
The banks drill down to a far lower level of detail.
The DTIs, while calculated on a per loan level, allow a bank to pick and choose - at the more detailed level banks work at - to allow a percentage of borrowers exceed those DTIs on a total portfolio level.
In effect, it constrains the banks overall, but allowances are made on a per loan level.
Or put another way, the central bank can constrain overall credit creation - when it feels it is necessary - to ensure most people can service their loans without undue stress.
It will depend on the detail of what.is considered income. I had a recent mortgage application with ASB. They accepted 80% of my Australian income, 0% of my Iraq income, and 100% or my Turkey income. It all seemed rather arbitrary to me. In contrast, the bank were quite generous in considering the prospective rent the property would generate in the assessment. No consideration for maintenance etc.
I understand that the DTI will only apply to taxable NZ income. In which case those with overseas business interests will suffer. If overseas income is included at 100% they will benefit.
Interesting that they used your Turkish income, it would have been scaled at the banks end regardless unless it is paid into a NZ account and tax paid in NZ. All rental income is automatically scaled at 75% in the banks servicing calculators and some banks also require details of insurance and council rate costs as well - this is for servicing requirements. DTI's are based on the full allowable incomes/total debt
If they implemented it at a level that actually made a difference, National wouldn't let them do it. So its like the proposed wealth taxes - they implement something that only affects a tiny percentage of the population so that everyone is happy and votes for it, then over time they ratchet up the rate until half the country is now paying.
If we are only talking about DTI itself, now it's perfect time to implement it. house prices had fallen to a lower setting, market is relatively cold, and a speed limit to lending will cause less pain to buyers.
I do wonder if DTI in the long run will be a blocker for first home buyers getting foot in the door. eventually house price will go up again, and first home buyers will save big chunk of down payment if their mortgage size are capped.
It will be a nice bit of social engineering as well. Keep the plebs out of the good school zones. While the high income earners will be allowed to buy anywhere they like, those on lower incomes will be excluded. The days of people making huge sacrifices to be able to buy a house in a good school zone so their kids can get ahead are over. They will be stuck in the cheaper suburbs with the crap schools forever.
those on lower incomes will be excluded. The days of people making huge sacrifices to be able to buy a house in a good school zone so their kids can get ahead are over. They will be stuck in the cheaper suburbs with the crap schools forever.
Low income earners have always been excluded form some things, how then does one get a higher income to remedy the situation? Could it be from working their way up the ladder in their organisation? Changing jobs? Upskilling themselves outside of work instead of expecting their work to give them the world over? Moving to a different location with better pay? Investing in themselves and learning about how to be more financially literate? Just because someone is on a lower income now does not mean they are not capable of changing their own circumstances to better themselves and their loved ones. House prices are still too high across the board, however nothing stops someone from planning their future and acting accordingly to better it.
Once you've gone to a crap school, and gotten a crap education, and can't get into University, its pretty much a done deal. Its intergenerational exclusion from building wealth. That's why in the past people have really stretched themselves to pay for a house in the top school zones, they know how much it matters.
Totally agree.
DTI is the wrong approach and will make the rich richer and lower income families, including those of particular socio economic groups will be excluded from the market. Its discrimination disguised as a macro tool - time will show the negative impacts this will have on NZ.
Said this before but there seems a disconnect between the RBNZ is doing and what the banks should be doing anyway. If there is genuine consistency of thought, the banks shouldn't be lending vast sums of money to people at high DTIs for the sake of their own bad debt provisions. So who is right here?
Great article, David.
Yes - get DTIs into the arsenal.
Yes - the arsenal is far, far from complete. The RBNZ must look further.
And central government must - and be forced too, if necessary - recognize they too have a roll to play. (And rewarding unproductive 'investment' with tax breaks isn't helping anyone except a tiny minority even if a large group of fools think they can join that minority in the future.)
Let's look at the US which is similar to NZ in terms of wealth inequality.
The top 10% of US households own ~65% of all the financial assets that the Fed pumps via its various money printing programs. Boomers are the wealthiest generation, and their spending is powering a very strong US economy.
The top 10% holds ~65% of all financial assets but only ~8% of the debt. The bottom 90% holds 92% of the debt but only 35% of the assets. This highly unequal distribution of wealth and debt presents a problem for a politician in a democracy.
So the avocado munchers get the rough end of the stick across the Anglosphere. DTI measures are not really going to benefit them in any way. The 10%ers don't really care anyway.
It's the middle you need to be concerned about. Who's going to pay the prices for their assets that they think they deserve and quite possibly need?
"Give it time, it will reach a breaking point where the middle have had enough and demand change"
At extreme wealth inequality, it can result in an uprising by the masses of the poor. Look at the French Revolution, & Russian revolution - the masses came out with their pitch forks.
Unfortunately there's also been and increase in "bread and circuses" provided to the masses since those times.
The "elite" were worried about the pitchforks coming many years ago. Nothing has changed, yet where are the pitchforks? If anything they celebrate them even more, emulation/imitation is the highest form of flattery, or they've become so divided they're unable to band together for a decent uprising.
It would appear the masses are caught in a combination of Stockholm Syndrome and Pavlovian Conditioning.
Financial stability is critical. Most people forget that. People only remember the importance of financial stability when there is no financial stability.
How easily people have forgotten the lessons of the global financial crisis of 2008. Remember:
1) the failed banks globally?
2)the failed finance companies in NZ?
3) the government guarantees of the depositors?
4) the government guarantees of debt issued by the NZ banks?
Those who have become adults after the global financial crisis are likely to be unaware of the consequences of lack of financial stability.
Most people have also forgotten and new generations are unaware of the failure of Bank of New Zealand in the 1990's and the recapitalisation by the government.
Even more recently, people have forgotten or even unaware about the run on the banks by depositors at Silicon Valley Bank, and Credit Suisse. If Credit Suisse had failed (& not been bought by UBS), who knows what could have happened globally as Credit Suisse was designated as a systemically important financial institution (SIFI)
Those who fail to learn the lessons of history are doomed to repeat them. Most people don't know what they don't know.
The best time for DTIs may be well past but I think you ignore (why I have no idea) the rationale of income as it relates to asset values....ultimately all asset values are underpinned by the ability of the economy (average joes) to service the required return.
It matters not if there is a surfeit of (international) capital to support NZ asset values if the hoi poloi are unable to provide a return or even avoid default.
I would be interested in knowing what is assessed as 'income' with the DTI tool. Currently my Australian bank only considers 80% of my income from Australia, and 0% of my income from Iraq. Also what about prospective rental income from an investment property? Looking forward to seeing more detail.
Apparently its ALL income, and gross income.
So an annual salary of 100k gross would be added to rental income of 100k gross, so 7 times that being 1.4m max debt.
They will probably average it over 3 months.
But give a bank a threat and they will policy it up the whazoo to protect themselves from themselves, like CCCFA, so who knows what specific bank policy ends up looking like.
Good Luck.
More govt control, they will tell you when to shit next.
DTI's internationally are usually only on Home Owners.
Putting them on Investors who use property as equity to finance other business operations is very dangerous.
The un-intended consequences will be lower economic growth and less jobs, you are stopping another sector of the economy.
An own goal once again for a socialist communust regime.
Puts an immediate stop to property investors building more houses as well, as they wont be able to finance it.
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