The new debt-to-income ratio limits soon to be introduced by the Reserve Bank (RBNZ) are going to have a pretty low-impact start, judging by the latest series of DTI figures released by the central bank.
In fact, at the moment, the limits don't look necessary - but of course in future they may well be.
The latest quarterly figures released by the RBNZ, these for the March quarter, show at the moment the numbers of new mortgages on high DTIs are well below the proposed limits. This squares with the RBNZ's earlier assertion that the DTI limits are not likely to be "binding" in their initial phase.
That, of course, could and likely will change - and it's not so long ago that the numbers of new mortgages on high DTIs was rocketing.
As we know, the RBNZ has hankered for some years for a DTI measure to add to its 'macro-prudential toolkit' alongside such already well-used measures such as the loan to value ratio (LVR).
Following a final round of public consultation earlier this year, the RBNZ has indicated it's going to be ready to push the go button by "the middle of this year". That's very soon now.
To refresh memories, the RBNZ proposes initially setting the DTI policy to allow banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6; and
- 20% of their residential loans to investors with a DTI greater than 7.
These percentages refer to new lending, not the total bank lending book.
They also announced they are proposing easing the loan to value ratio (LVR) settings at the same time as activating DTIs. The RBNZ proposes easing LVRs to allow:
- 20% of owner-occupier lending to borrowers with an LVR greater than 80%; and
- 5% of investor lending to borrowers with an LVR greater than 70%.
So, before we get to that point, it's very timely to have a look at just what the borrowers are doing out there.
The RBNZ has been compiling DTI information since 2017. The information is monthly, but released quarterly. In very broad terms the information released since that time has shown a period where DTI ratios fell - roughly from the 2017-19 period and then they started to absolutely rocket in the 2020-21 period before falling to much lower levels more recently.
We've been following these DTI figures from the start and compiling our own tables, looking specifically at for first home buyers (FHBs) and other owner occupiers, borrowing at DTIs of over five (regarded as a 'high' DTI), while we've been looking at investors with DTIs of over seven.
Fortuitously for us, of course the RBNZ's actually targeting DTIs of over seven for investors, so, that makes our ongoing investor table very salient. But for the FHBs and other owner-occupiers the official target is going to be a DTI of over six. Okay, so we've started doing at table now that shows the percentages of FHBs and owner-occupiers with a DTI over six.
For old time's sake, however, were are also keeping up with our FHB/other owner-occupier table showing the latest figures for ratios of of over five.
As we've done since the start of this data series we are comparing the latest month's figures (March 2024) with the last month from the previous release (December 2023) and we are also comparing both these with March 2023 and March 2022.
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 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| FHBs nationwide | 22.5% | 23.9% | 28.4% | 53.9% |
| Auck FHBs | 35.3% | 34.1% | 41.3% | 67.7% |
| Non-Auck FHBs | 13.6% | 15.9% | 18.3% | 41.9% |
| Other owner/occ nationwide | 19.3% | 20.9% | 22.5% | 44.1% |
| Auck other owner/occ | 28.3% | 30.4% | 29.9% | 57.2% |
| Non-Auck other owner/occ | 12.1% | 14.0% | 16.9% | 34.2% |
Please note that our calculations in all three of our tables here exclude the (small) amount where the DTI size is unknown.
What do we think? That nationwide FHB figure is the lowest since the RBNZ started compiling this information and a long way down from where we've come - as you can see from the March 2022 figure where over half the FHB mortgage money was on a DTI of over five.
I would suspect we are pretty much at 'the bottom' now though in terms of how low these figures might get. We shall see.
But anyway, moving on, let's look at the figures for FHBs and owner-occupiers where the DTI is in excess of six. This is where the rubber meets the road because this is going to be the new official limit once the DTIs are introduced.
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 six times:
| Group | Mar 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| FHBs nationwide | 4.9% | 6.1% | 7.6% | 23.5% |
| Auck FHBs | 8.0% | 9.6% | 12.7% | 33.7% |
| Non-Auck FHBs | 2.7% | 3.3% | 3.7% | 14.6% |
| Other owner/occ nationwide | 6.5% | 7.8% | 6.3% | 23.3% |
| Auck other owner/occ | 9.1% | 11.0% | 9.7% | 33.7% |
| Non-Auck other owner/occ | 4.4% | 5.4% | 3.7% | 15.5% |
So, as we can see, none of these figures are anywhere near the 20% limit being set by the RBNZ, and it's difficult to see that situation changing in the next few months.
But we can also see that two years ago - in March 2022 the nationwide and Auckland figures were both OVER that RBNZ limit. So at that stage the limits would have had an impact of reining in the mortgages.
Anyway, that's the FHBs and the owner-occupiers. Our next table that as explained above we've been running for a while - but which now takes on greater relevance given that we've accidentally picked the 'right' DTI number of seven - looks at the investor and those owner-occupiers with investment collateral 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 24 | Dec 23 | Mar 23 | Mar 22 |
|---|---|---|---|---|
| Investors nationwide | 8.7% | 5.9% | 10..0% | 26.4% |
| Auck investors | 10.4% | 9.5% | 13.4% | 35.7% |
| Non-Auck investors | 6.9% | 2.5% | 6.6% | 18.1% |
| Owner/occ + investment collateral nationwide | 8.8% | 8.1% | 10.4% | 26.2% |
| Auck owner/occ + investment collateral | 7.6% | 9.2% | 11.8% | 34.8% |
| Non-Auck owner/occ + investment collateral | 10.0% | 7.3% | 9.3% | 19.1% |
Interestingly, most of these figures have actually ticked up a bit since the previous quarter - though again they are still well below the new limits. But it reinforces the thought that perhaps we've seen the bottom of the cycle in terms of the reduction in high DTI borrowing.
And so, there we are once again. Next stop is the official announcement from the RBNZ as to when the limits are going to be put in place. That of course will make future releases of this data much more relevant. Interesting times await.
46 Comments
Yes!
Reminder this is Debt to gross Income, not House Price to real (net) income
This allows for house prices of 1.25x the DTI relative to (gross) income, or house price multiples of 7.5x for FHBs. Nowhere near affordability, since I presume the majority will max out. Still pretty crazy
Agree, part of the plan, keep interest rates high to drive down prices, introduce DTIs to get them in place, then tighten the ratio and force all of the small landlords to sell up at low prices to the big players who then rent them out again. Wealth transfer is the aim.
That highlights the problem. Debt farming unsupported by income can only survive by rising price, rising to the detriment of all non players in the game. A non yield based strategy. Without a yield based return big money will have little interest.
Done in mass, it is exploitation of the have nots.
Great analysis !
The credit department of the banks has a few grey haired third Rodeo staff left through the past restructures....
It may help more cap prices as Interest Rates are lowered.
Not sure how a Spruikers are going to enjoy chewing on this bitter poison pill
In the early stages when DTI was proposed and discussed on here, Spruiker contributors reacted as if it were an STD. I recall one poster the day after the election posted "DTI's will be gone by Christmas" The leveraged property flipping game ain't as exciting as it used to be.
Silly observation time: Doesn't having a higher DTI for 'investors' advantage them over OOs and FHBs?
Sure, I understand the risks faced by banks may be less for 'investors' but let's be clear: this policy, allowing 'investors' to outbid other groups, is a Banker's Policy ... But isn't Public Policy.
I think that's right - when banks started to implement it unofficially a few years ago they were applying a discount to rent (to reflect the associated costs) but I think this has been ditched. Disappointing decision.
Nevertheless, a 3-5% yield doesn't get you very far on a DTI of 7 - investors will need to bring a large external income into the equation or build up very large deposits (60-80%). No more buying a new property every year.
"... and assuming capital growth of 7% per year, ..."
Nice one. Laughed so hard my coffee went everywhere.
Most people who are selling now are getting a 3-5% gross nominal per annum return (if they are lucky) irrespective of when they bought.
Seven percent is the old "houses double every 10 years" nonsense. Sorry, it is just not true. (It might have been at the top of the last boom for a few more people but that's what the DTI's are for ... Stopping outrageous and unsustainable rises in property prices.)
"DTIs are an unnecessary tool. "
DTI's are to address the RBNZ's other mandate - financial stability.
People only remember the importance of financial stability when there is financial instability.
Remember 2009 when there was financial instability in NZ and globally? Remember the government support required?
Remember the financial instability last year in the US with Silicon Valley Bank?
When trust and confidence is lost by depositors and other bank creditors, it is almost impossible to restore without outside help. Loss of confidence in one bank can spread to loss of confidence in other banks.
Remember the recapitalisation by the government of the BNZ in the early 1990's?
Those who fail to learn the lessons of history are doomed to repeat them.
RB DTIs are completely unnecessary because the banks already check this
How well checked was stress testing at 5% when interest rates were around 2.89%? Do you truly trust the banks to do all the due diligence for you if you wish to borrow? If so I'd be worries. We saw what banks did when the opportunity arose from the removal of LVR's in 2020. They threw as much money as they possibly could at residential mortgages as prices were skyrocketing (partially because everyone has sudden [foolish] access to so much money), and because investors could use their current properties as ATM's to amass more assets. If they had not removed LVR's the prices would not have reached such a ridiculous peak, vendor mentality that they will still get 2021 peak prices now would not exist, and young people may be more enticed to stay in NZ with the hope of one day owning a home. Had there been the proposed DTI's in place in 2020, at least that would have limited the number of investors able to outbid FHB's and limit the amount FHB's could borrow to a more reasonable and maintainable value.
Did you have a look at the tables in the article? Have a look at the 'Mar 22' columns of the 2nd and 3rd tables. If any of those numbers are greater than 20, then no. The banks were not already checking this.
When it mattered, the banks shut their eyes on DTI so they could push more money out the door. That's why they need a grown up to set the rules.
Of coarse banks check your income to see if you can afford to repay the loan before handing one out, this is a form of DTI. The contract is between the bank and the borrower, and the bank wants to make sure that they have an acceptable level of risk in the arrangement. This is the way its been done in NZ. We don't need the reserve bank interfering into something that's already working.
Banks throughout history have proven themselves incapable of properly managing risk unless they are forced to. What makes you think times have changed? Even in little old New Zealand, there have been bank failures in living memory, not to mention finance companies:
"Of coarse banks check your income to see if you can afford to repay the loan before handing one out"
This isn't actually what they do at all.
They really don't want you to repay the loan at all. They want you to stay in debt and keep paying them interest. That's how they make their money. When they check that you can afford the loan, they're really only looking a few years ahead. No more, although they pretend they do. After a few years they rely on capital appreciation and smallish rises in the equity you've built up by repaying small amounts of principal. So long as they can recover the outstanding principal in a mortgagee sale, or make more money by "helping you out", they're completely okay with everything. Of course, they'll never publicly admit this. But once you've been inside the upper echelons of banking you know that this is exactly how they work.
Golly. Such a shame so many don't understand how banks really work.
"RB DTIs are completely unnecessary because the banks already check this. "
Laughable. The only thing the banks check is that the property can be sold to cover the outstanding mortgage. Believe me, they're quite comfortable in taking the owners deposit from them so long as they don't loose money.
"The only good thing that might happen is that the RB tightens DTI instead of raising interest rates at some point in the future, maybe."
I would hope so.
LVRs only cover part of the underwriting equation. DTIs are the other part (and many would argue the larger part). That said, the RBNZ seems beholden to the whims and wants of the banking lobby so I'm not sure they'll act sufficiently strongly and they'll always be way late in doing anything even when they must.
Indeed.
Banks have no interest in poor people as they can't lend substantial amounts from banks. Banks see no money to be made from poor people. So they lend to richer people who can take advantage of tax laws, government policy (e.g. accommodation supplements) and time to make small returns, while the banks make the bulk of it. In essence, banks leave the dirty work of taking money from poor people to the richer people above them. It's a great system ... If you're a bank.
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