They are finally here. So, what do we do? Well we can start by pretty much ignoring them. For now.
Nearly a decade in coming to fruition, the debt-to-income (DTI) mortgage restrictions officially took effect on July 1.
And the effect of them for the moment - is no effect. New figures for the month of July show the overall numbers of both owner-occupiers and investors above the targeted limits are negligible. So, it's a very quiet start for the new regime. But give it time. Currently we have a weak house market and interest rate levels not conducive to people borrowing amounts at vast multiples to their income. Not like before when interest rates were virtually non-existent.
The implementation of the new rules follows a long battle by the Reserve Bank (RBNZ). Our central bank didn't seek a DTI measure at the time it negotiated creation of a 'macro-prudential toolkit' with then Finance Minister Bill English in 2013, but soon after decided it did want one - only to then get government push-back against such a measure.
But the RBNZ was nothing if not grimly determined, and it got there in the end. And so now we have a DTI measure alongside other macro-prudential tools such as the already well-used loan to value ratio (LVR) limits.
The two measures will sit alongside each other and should theoretically complement each other well.
Introduction of the DTIs follows a period that saw the DTI ratios absolutely rocket for a while (peaking in 2021) but then fall away sharply. And the RBNZ ahead of time indicated the new rules would not be 'binding' in their initial phase. But of course, that won't always be the case and the the RBNZ can tweak the settings if it wishes.
About those settings:
Well to refresh memories, the DTI policy allows banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6 (that's a loan over six times annual income); 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.
In conjunction with this the LVR settings were eased for banks 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%.
Our unofficial calculation of how things stand based on the figures for July, is in that month only 3.1% of lending to owner-occupiers (including first home buyers) was on DTIs of above 6.
In terms of investors and owner-occupiers with investment property collateral, just 3.8% of the total amount borrow was on DTIs of above 7.
So, in terms of lending to both the owner-occupiers and the investors, the banks are not even close to running up against the 20% limits.
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.
The latest quarterly release of the DTI information was delayed as the DTIs took effect and so as well as including the June quarter information it also includes the month of July.
The RBNZ says now the DTI regime is under way it is aiming to publish new tables in the coming months with additional data from the DTI survey and at more timely intervals to complement its monthly loan-to-valuation data releases.
Anyway, we've been following these DTI figures from the start and compiling our own tables, looking specifically at first home buyers (FHBs) and other owner occupiers, borrowing at DTIs of over 5 (regarded as a 'high' DTI), while we've been looking at investors with DTIs of over 7.
As I've said before, fortuitously for us, of course the RBNZ' is now actually targeting DTIs of over 7 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 6. Okay, so we've started doing a table now that shows the percentages of FHBs and owner-occupiers with a DTI over 6, as well as keeping up with our over-5 table.
As we've done since the start of this data series we are comparing the last month of the quarter (June 2024) with the last month from the previous release (March 2024) and we are also comparing both these with June 2023 and June 2022. But, and there's more - since the RBNZ has released this latest information a month later and has given us July 2024 figures as well, these too have been included. It can be seen though that there's not a great difference between the June 2024 and July 2024 figures.
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 5 times:
| Group | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| FHBs nationwide | 16.5% | 16.3% | 22.5% | 29.9% | 46.9% |
| Auck FHBs | 22.5% | 26.2% | 35.3% | 43.7% | 60.3% |
| Non-Auck FHBs | 9.6% | 9.2% | 13.6% | 18.8% | 34.5% |
| Other owner/occ nationwide | 15.5% | 16.0% | 19.3% | 23.3% | 38.3% |
| Auck other owner/occ | 21.7% | 22.0% | 28.3% | 33.6% | 49.6% |
| Non-Auck other owner/occ | 10.5% | 11.2% | 12.1% | 14.9% | 28.4% |
Please note that our calculations in all three of our tables here exclude the (small) amount where the DTI size is unknown.
Okay, so, that's DTIs of 5.
Next up, we look at the figures for FHBs and owner-occupiers where the DTI is in excess of 6. This of course is the actual level on which the new official limits have been set.
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 6 times:
| Group | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| FHBs nationwide | 1.6% | 2.2% | 4.9% | 5.9% | 16.0% |
| Auck FHBs | 2.9% | 4.2% | 8.0% | 11.0% | 23.6% |
| Non-Auck FHBs | 0.5% | 0.9% | 2.7% | 2.3% | 9.0% |
| Other owner/occ nationwide | 3.9% | 5.1% | 6.5% | 8.6% | 18.6% |
| Auck other owner/occ | 4.4% | 6.8% | 9.1% | 13.0% | 26.4% |
| Non-Auck other owner/occ | 3.5% | 3.7% | 4.4% | 5.0% | 11.5% |
As we can see, this is beyond comfortable.
But if we look back at June 2022 we can see the Auckland figures blowing up beyond the 20% mark - although of course the figures are measured nationally. By June 2022 the peak highs had been left behind though.
In fact to just quickly throw back the attention to June 2021, in that month other owner occupiers with DTIs of over 6 made up around a quarter of the total - so over the 20% limit. And for investors it was a bit worse. Those with DTIs over 7 made up in excess of a third of the total. If therefore the current DTI limits had been in operation in 2021 they WOULD have been binding and banks would have had to ration the lending.
And so, what of the investors right now, anyway? Our final 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 7 - 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 | Jul 24 | Jun 24 | Mar 24 | Jun 23 | Jun 22 |
|---|---|---|---|---|---|
| Investors nationwide | 3.5% | 3.7% | 8.7% | 9.0% | 16.8% |
| Auck investors | 3.4% | 4.8% | 10.4% | 13.6% | 23.0% |
| Non-Auck investors | 3.7% | 2.4% | 6.9% | 4.5% | 9.9% |
| Owner/occ + investment collateral nationwide | 4.2% | 6.3% | 8.8% | 7.3% | 14.7% |
| Auck owner/occ + investment collateral | 4.1% | 8.3% | 7.6% | 8.7% | 17.7% |
| Non-Auck owner/occ + investment collateral | 4.2% | 4.6% | 10.0% | 6.3% | 12.2% |
So, there we are. All very comfortable at the moment. For now the banks have nothing to worry about. No need to 'ration' the lending based on DTI numbers.
But as we know from what happened in the early part of this decade, things could change fast. And those DTI limits - apparently redundant at the moment - would become a big thing.
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34 Comments
I might have missed it in the good article above, but why do we use Gross Income and not Net Income to derive the figures? Surely it's the ability to pay with Net Income that matters? Or is 'Gross Income', the amalgamation of many streams of Net Income - which makes calculations more complicated by the second!
"Your total debt will include things such as any existing home loans, personal debts (e.g. car loans), and student loans, as well as the limits of any credit cards and overdrafts, plus any new loans being considered. Your total gross income will include your annual salary, rental income and other extra income you receive.
For example, if you have a total debt of $500,000 and your total gross income is $80,000, your DTI ratio is 6.25. This means your total debt is 6.25 times your total gross income."
https://www.kiwibank.co.nz/personal-banking/home-loans/guides/debt-to-i…
I might have missed it in the good article above, but why do we use Gross Income and not Net Income to derive the figures? Surely it's the ability to pay with Net Income that matters?
My stab in the dark is that a home loan is going to be viewed as an expense replacing an existing expense (i.e. rent or another mortgage).
The bank is still going to run over your income vs expenses to see if they reckon you can service the debt.
RBNZ is referring to gross (before tax) income, see Kenzo and Sachiko example at:
https://www.rbnz.govt.nz/education/explainers/dti
Pre or post tax not a big deal as it could be offset by a change in DTI ratio itself. RBNZ presumably happy with the numbers (DTI) based on gross income.
"Your total gross income will include your annual salary, rental income and other extra income you receive"
Fine. Except how does Negatively Geared rental income figure into that? Gross income can be overwhelmed by assorted Costs and turn into a Negative Net Income - if you're doing it right, apparently. Conceivably, the Net Tax Rate can affect any Net Income, from where any loan repayments have to be made.
Much easier to get a current and last year's IRD return Net Income figure to do the calculations with? And in the Kiwibank example, that would push the ratio from 6.25 to 7.25.
I don't think Taxable income is easier than gross income for administering a DTI system. Also, if the goal is ability to pay/cashflow taxable income is also not a good measure e.g. depreciation (book rather than cash loss), may affect taxable income but not a person's ability to pay. I agree gross income is not a focused tool but the DTI needs to be easy to administer and apply as a global check (line in the sand) on total borrowing as opposed to an in-depth analysis of every borrower. Could we make a gold standard DTI where an audit of each potential borrower is carried out with a meticulous review of spending habits. Sure. Chances of that happening = zero.
The banks can deal with the specific amounts when issuing loans. An easy to calculate DTI is the aim with this RBNZ tool.
Except how does Negatively Geared rental income figure into that
No need to worry about that. On one side you have total gross income (salary, rental etc) and the other side you have total debt (mortgage, IP mortgage, cc, personal loan). It does not matter how much of which income pays for what expense, there are other cashflow calculations the bank will do to cover this off. Though if you are negatively geared, you're likely higher DTI already, meaning your ability to get more debt is lower.
I guess it's just a case of picking one measure of income to benchmark the DTI against. Gross income would be simpler as everything else is just noise with a bunch of variables, and working on net income would have some perverse impacts.
What is Net Income for FHB? Is it just after tax? What about fuel costs? Rates and insurance? Does someone who spent 12 months paying for Netflix, holidays etc have to wait for another 6 - 12 months of limited discretionary spend to bring their DTI "score" weighting back up?
If it's just "after tax" then it really doesn't matter if we work on 5 x DTI Gross Income because it'll just be 6.25 x DTI on Net Income (+/- effective tax rate).
Because everyone can have a different amount of tax even if they earn the same income. See people with multiple jobs, those with work income & pension, those with student loans, child support or working for families, self employed or own a businesses etc.
It can be a mess and assuming everyone is on a vanilla PAYE rate is the reason why the IRD still has a high rate of hatred for their customer service levels and flaws with their website. Net income is not something we have many good data sources necessarily (even for a single person it can change rapidly & repeatedly during a year), we certainly have more data sources on the gross income that can be used.
Yes everyone let us divide against those horrible envious DGMs who believe in creating prosperity for future generations - instead of putting high debt burden upon their lives so that those who already own housing can reap even more untaxed capital gains…how dare they! They are such horrible people that we should all dislike because they are just envious of our success/wealth.
(sarc) (and I’m not using DGM or spruiker to belittle anyone or their position - only trying to highlight how shallow and ridiculous it is to call people DGMs who only wish the very best for their children’s generation - so they may have the same opportunities as those that were available for the generations before them).
You want the RBNZ to deny people a loan that they can afford and force them to rent. All in the hope that it drives house prices down, when it may have no effect at all (people with high enough incomes can still outbid each other for investment properties to rent to those who don't).
If setting it to 3 makes houses affordable, why not set it to 0 and they can be even more affordable?
I don't mind DTIs to prevent people borrowing stupid amounts during times of very low rates (which is what the RBNZ have implemented), but anything more than that would get the opposite outcome IMO.
It all comes back to whether the banks are prudently lending and not putting taxpayers/depositors at risk and of course, creating 'debt slaves'. If they are prudent, then there is no need for macro prudential regulation. And then the next test is whether the regulator knows what they doing even if the banks don't.
I guess it depends on how many people are cash buyers? Otherwise these people with high enough incomes are not immune to DTI's and in fact if they're looking to debt stack to accumulate a bunch of properties, each additional property they buy will dilute their DTI.
I realize your comment wasn't a direct response to my comment, but I just want to clarify that what I wrote was my personal preference, what I like. I think DTI rules should be removed entirely, let the free market sort it out. That would entail a lot more than removing DTI limits though.
I'd be interested to know what the interest rate has to be below to make DTI's the constraint. I guess it depends on what the banks are willing to let P&I exceed net income after essential costs?
If it is <2%, then that's a pretty generous threshold given we're talking about close to zero real rates.
A lot of agreement here that the DTIs are set too high and wont have much effect at all. But the DTI number can quickly be adjusted by the reserve bank if necessary a la 2020 - 2021. It would be good if this did happen rather than taking the OCR high for everyone including the productive economy. Let's see what happens the next time the housing market gets out of control and NZ leads the world for all the wrong reasons again.
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