The debt-to-income tide has turned in a big way, RBNZ figures show

Property / opinion

Latest figures show that having stretched themselves further and further in recent times new borrowers are now markedly stepping back from super-high borrowing levels

23rd May 22, 11:27am by David Hargreaves

Back from the brink, perhaps?

According to the latest mortgage lending by debt-to-income ratio (DTI) figures from the Reserve Bank (RBNZ), new borrowers are stretching themselves much less than in recent times.

The March quarter figures confirm the tentative impression of a retreat from super-high DTI ratios seen in the December figures.

Before that, over the past two years, the figures had been going up and up in line with the housing market.

Its probably a point for debate whether the big retreat from high DTIs we are now seeing is due to caution on the part of borrowers, or the much more conservative approach banks are now taking (partly forced by reintroduction of loan to value ratio limits). It's probably a combination, between those two things and the demands of much higher interest rates and the fact the housing market is falling.

Either way, it will be giving the RBNZ a fair degree of comfort (comfort it will NOT have had previously) as the central bank moves toward now finalising by the end of this year a framework for potential adoption of some sort of debt servicing limit measure. The RBNZ doesn't seem to be in any hurry now (which it was previously), and these latest figures would give a reasonable clue why.

But let's not be in any doubt, the DTI figures for particularly the first home buyers are stilll stretched and presumably the RBNZ will be happy to see those come down further - particularly in Auckland. But, the FHB figures, in terms of percentages of high DTI borrowing, HAVE come down to around the level they were in March 2021.

In terms of the owner-occupiers, the investors, and the owner-occupiers with investment collateral, these ratios have moved down much more markedly and the percentage of high DTI borrowing among these groupings is now far lower than it was a year ago.

As we've done since the start of this data series we are comparing the latest month's figures (March) with the last month from the previous release (December 2021) and we are also comparing both these with March 2021.

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 five and above. Our calculations in both tables 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 22	Dec 21	Mar 21
FHBs nationwide	53.9%	58.3%	53.5%
Auck FHBs	67.7%	72.9%	67.7%
Non-Auck FHBs	41.9%	46.6%	41.7%
Other owner/occ nationwide	44.1%	48.5%	45.4%
Auck other owner/occ	57.2%	62.2%	60.6%
Non-Auck other owner/occ	34.2%	38.1%	33.4%

Okay, that's the FHBs and the owner-occupiers. Then our next 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.

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 22	Dec 21	Mar 21
Investors nationwide	26.4%	35.5%	36.5%
Auck investors	35.7%	45.2%	48.3%
Non-Auck investors	18.1%	26.2%	25.2%
Owner/occ + investment collateral nationwide	26.2%	34.0%	33.7%
Auck owner/occ + investment collateral	34.8%	43.4%	43.0%
Non-Auck owner/occ + investment collateral	19.1%	26.4%	25.4%

So, there we have it. Official confirmation of a trend that looked to be forming in December (about the time the market began to freeze over). It will be very interesting to track these figures during the course of this year as the market continues to cool and interest rates continue to heat. In such an environment, further easing of these high DTI levels looks a sure thing.

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60 Comments

by DTRH | 23rd May 22, 11:52am 1653263577

Huge amount of debt, by letting people go over 3 x DTI just put price’s of property up now the system is broken and the process of bringing price’s back down is underway, to make houses more affordable the price’s will need to drop to a place where average wage couple can buy at 3 x DTI.

by GV 27 | 23rd May 22, 12:37pm 1653266221

Well, yea, prices becoming more affordable will generally involve prices becoming more affordable, that's the definition. But people are very good at assuming the 'average wage' couple would keep their job in the event house prices fell to that level; at $110K average household income, the average price would have to be under $350K for this to be doable. Does anyone really think we're likely to see that without some sort of collapse in employment to go with it?

by J.C. | 23rd May 22, 1:00pm 1653267645

Does anyone really think we're likely to see that without some sort of collapse in employment to go with it?

Well that's what you get when your economy is built around a housing bubble. Keep throwing kitchen sinks or face the music.

by DTRH | 23rd May 22, 1:18pm 1653268686

GV27 when house price’s we’re 350k for 3 bedroom house was there a collapse in employment, no all that has happen is a number of uninformed people got greedy thought interest rates were going to stay at emergency levels or low for years, borrowing way to much putting themselves in huge debt now inflation has hit and rates will be climbing up the whole system will implode and as housing is NZ biggest bubble it will be hit hard. Have you got a problem with housing more affordable if so why ?

by GV 27 | 23rd May 22, 1:27pm 1653269251

I have a problem with people naively thinking you can unwind years worth of baked in price increases with no changes in consumer spending or employment consequences in the same environment. It's nothing against 'housing being more affordable' or whatever you might want to make up to get your knickers in a twist - the fact is that rising interest rates and inflation are changing people's spending habits and crashing the average house price by 70% is going to have some major impact on the economy. Life is simple if you live in the world of sweeping generalisations and don't want to think about the consequences, but that's not the world most of us live in.

by DTRH | 23rd May 22, 1:49pm 1653270588

You seem quite naive if you think a 3 bedroom house on a tiny piece of land is worth over a million in Auckland. Downturns happen recession happen we are just about to see another . Was we going to live in a country where only top 5% can afford a decent house this would bring a breakdown of society crime and poverty for half the population. GV27 if you was one of the naive people who thought rates were going to stay low and its ok to have a DTI of x 5 or over, maybe you should start a club and discuss where you went wrong and how to avoid future bubbles.

by In Vino Veritas | 24th May 22, 2:59pm 1653361169

DTRH, I've invested in property for years and have been through recessions, shocks, high interest rates, low interest rates etc etc. Here's a truism for you, just like the share market, property prices go up in the long run, not down. If you ride it out, you win. Your comment regarding a 3 bed house on a tiny bit of land being worth over a million - it is if someone thinks that it has that value, then it is worth it. And you can bet your house, that even if that number falls in the next year, it will be back in spades a year or two after that.

Will there be a fall in prices, yep, it's happening now, will it be massive, in my opinion, nope. And here's my reasoning. Grant Robertson is in the shit. There is, as many on here have already mentioned, a recession coming. A few months ago, the US yield curve went negative. Just for a day or so, but still negative. That is almost an unfailing indication of recession in the States. If there, then here. To prevent the recession from biting too deep (especially before an election), Robertson will not want to see interest rates continuing to increase, in fact, he will want them to go the other way. Orr, instead of being independent, pretty much does as he is told, and Robertson will want him to halt at best, and drop them at worst. And this is the Robertson and Orr that signed a document saying that it was RBNZ's job to keep inflation under 3%. And they are forecasting >5% for the next 2 or 3 years! Banks are already softening their forecasts on rate increases in the expectation that Orr will slow up.

Last thing, no one is making any more land.

by fender bender | 23rd May 22, 2:09pm 1653271743

What's the consequences of keeping the mouse / house wheel going.

What's the consequences of houses dropping 40 - 70%.

Which option has the least victims.

Which option has the most beneficiaries when counting current young and future generations

by Averageman | 23rd May 22, 5:06pm 1653282385

Indeed. Very obvious. Burn everyone, or just burn the over leveraged risk taker.

by Fitzgerald | 23rd May 22, 2:09pm 1653271771

It is not naive to think that you can unwind years of baked in price increases.

All you have to do is look at the crashes that happened in:

- Ireland

- USA

- England

- Spain

- Japan

Etc, etc to see that, in fact, it is fairly common for prices to rapidly unwind from overbaked levels.

And the NZ housing market is arguably far more overbaked than the markets in any of those other countries were before their crashes.

by GV 27 | 23rd May 22, 2:17pm 1653272271

"And the NZ housing market is arguably far more overbaked than the markets in any of those other countries were before their crashes."

Yea.... which is my point. We have a bunch of businesses staggering post-Covid, inflation through the roof and we have totally overheated the market. Places that have had 'corrections' are not really that useful when it comes to measuring the flow-on effect of an outright collapse in house prices - and the fact that the NZ markets is overheated makes comparing it to other markets kind of redundant.

by fender bender | 23rd May 22, 2:28pm 1653272935

Businesses are being equally hammered by unrealistic commercial property valuations, that in turn lead to unrealistic rent expectations from landlords. Not to mention commercial property being converted to residential starving inner city areas of trades type businesses.

by Averageman | 23rd May 22, 5:08pm 1653282491

Correct again. Lots of rent deals in AKL at demanding $600 sqm with a 300sqm kickback (I mean incentive) out of the view of the bank and valuer. Last time this was considered "normal" was the mid 80s...

by Fitzgerald | 23rd May 22, 2:11pm 1653271912

by J.C. | 23rd May 22, 4:46pm 1653281210

I have a problem with people naively thinking you can unwind years worth of baked in price increases with no changes in consumer spending or employment consequences in the same environment.

Completely agree with you. Unfortunately the NZ ruling elite didn't see it the same way.

by Dale Smith | 23rd May 22, 9:05pm 1653296731

The naivety is thinking that increasing prices relative to income was not to end in anything but a crash.

But since naivety also means a lack of understanding, people tend to ignore any evidence that gets in the way of them earning income.

It's well documented that any median income to housing multiple over 3x income indicates a dysfunctional housing market.

by CeeJ | 5th Jun 22, 6:57am 1654369071

It will unwind the people that have jobs dependent upon the sugar high that is an overpriced housing market.

by Mannering | 24th May 22, 9:58am 1653343113

DTRH, have you ever heard of punctuation ?

by malamah | 23rd May 22, 1:29pm 1653269373

DTI of 3, is $330k debt. Adjusted for 20% deposit is $412K.

If you consider the 20% deposit (~80% of FHB loans have 20%) FHB seem to be saving now as a starting point for a ~lower quartile first home average of 800K (assumptions made), it's easy to assume as a DTI of 3, they would be looking to buy in the $440 - 490k price range, which is $330K + a deposit of $110 (wage) to 160K (currently).

More likely is that deposit will shrink over time due to inflationary factors and lower housing prices, and more likely than that is a higher DTI of 4 - 5.

If the question is, will a house that cost $800k November 2021 cost $550k - $660k by mid 2023, then that is possible and would be the result of a drop of 18 - 32%.

Better yet would be to use the median income and median house price for comparison, however that would result in a much larger drop as the median household income is closer to $100k and the median house price is over $800k.

by GV 27 | 23rd May 22, 1:36pm 1653269793

Now this is more like it. However I think you've seen a strong signal already that the Govt won't let house prices correct as much as that with the changes to the First Home Loan (is it still Welcome Home Loan) scheme, upping the FHB caps - so I'd suggest intervention before you reach that point is likely given this seems to be a policy-call on where a 'floor' should be.

But I think people also need to be prepared for incomes to drop in real and nominal terms and people are seriously underestimating how much it will take to spook consumers into spending less than they already are, so assuming that incomes will only ever go up with the DTI is making some assumptions that may turn out to be optimistic (e.g. easy to have a high household income if everyone actually has a job).

I really don't know how we get out of this without either swathes of bagholders or locking even more people out. If there was an easy solution with no downsides, we'd probably have tried it. Pretending one exists helps no one.

by malamah | 23rd May 22, 1:45pm 1653270359

It's very difficult to pick the floor. But I guess if it were easy then everyone would be buying then and house prices would be as volatile as bitcoin.

In all honesty I believe mortgage debt will become more affordable in the 3 - 5 year period, and house prices will land in the middle where the larger barrier to entry will be the deposit/equity required to buy rather than the ability to service debt. This will remain an issue until wage inflation meets the market in the middle, perhaps 5 - 10years time?

by Independent_Observer | 23rd May 22, 2:49pm 1653274192

I think you risk being mislead into thinking that 'somebody' is in control of the housing market. Its become massively speculative and anything that is speculative is beyond rationality and control....its animal spirits and based upon fear and hope. Not cash flows, not fundamentals, not reason.

'Somebody will intervene'.....who? RBNZ have already stated that house prices aren't their mandate hence why they didn't care at all when prices went up 30-50% over 2 years when they dropped rates to zero to avoid deflation. Likewise, they won't care if prices fall 30-50% in the other direction. They will care it is causes deflation and excessive unemployment....but that might be something that happens as a result of price falls so won't act until its too late to save the housing market.

Government fiscal policy will save the housing market? I don't think so....they partly to blame in causing it to fall by pumping excessive money into the system during a period of stagnation resulting in higher inflation, which is resulting in higher interest rates, which might be the same thing that crashes the market.

So the people who you think might be the one's who save it, are also the ones who have created the conditions for a significant, potential, fall. Its difficult to be two people at once, or to want two outcomes at once which are contradictory/opposite of one another.

by GV 27 | 23rd May 22, 3:04pm 1653275075

"They will care it is causes deflation and excessive unemployment....but that might be something that happens as a result of price falls so won't act until its too late to save the housing market."

I'm arguing that this is extremely likely and I suspect the RBNZ knows it. At this point it's the only thing I can come up with that explains why they've been so reluctant to move closer to the Phillips Curve when it is so clear that moving away from it blew everything out. I think we've reached the point where the slightest increase in temperature will cause everything to boil over; too many people too highly leveraged and policy makers in catch-up mode or, in some cases, just having given up altogether.

The alternative is that this isn't a conscious choice and they actually aren't in control at all, which is even more terrifying and I'm not sure makes it any less likely that we see a sharp correction, followed by a gutting of discretionary incomes and spending that causes a major ripple effect.

by malamah | 23rd May 22, 3:27pm 1653276475

In 2020 a hole was made from the inside of the starboard side of the boat. In 2021 the port side revealed a hole as well from an external blunt force. RBNZ are trying to control the water flow so the boat lowers evenly into the water.

by Independent_Observer | 23rd May 22, 3:56pm 1653278163

"they actually aren't in control at all, which is even more terrifying"

Not to offend, but I'm surprised its taken you this long to figure that out.

No central bank where the property market that has become as speculative as our has, has ever had control of it. I think we lost control of our housing market around 2013 when we could have changed the lending risk weightings of the banks away from residential property....but we didn't do that....

And now we have the cart leading the horse....i.e. a housing market dictating and economy. Its bound to end badly.

by Independent_Observer | 23rd May 22, 4:01pm 1653278495

I view the market as a game of hot potato....and the hot potato is the bad debt. Reducing rates made it easier to pass the bad debt around. Rising rates makes the potato hotter.

No problem if you are mortgage free.....but if you are a developer with unsold properties or a FHB loaded up with debt and in a marginal role that might be the first to go in a recession, I'd be quite concerned.

by donny11 | 23rd May 22, 12:21pm 1653265279

Nothing wrong with a lot of debt so long as the government inflates that debt away at a higher rate than the interest you are paying..... hell at this point the more debt you have the more money you make!

by Nzdan | 23rd May 22, 12:30pm 1653265808

The only way that can be truly done is if the Government continues ratcheting up the minimum wage (wage inflation).

by malamah | 23rd May 22, 2:01pm 1653271272

Well it'd be one way of introducing a universal basic income! Inflate away wage disparity through aggressive minimum wage hikes lol

by refactornz | 23rd May 22, 2:54pm 1653274466

Which is exactly what they will do Nzdan

by Independent_Observer | 23rd May 22, 2:58pm 1653274707

But to save the housing market you need deflation refactornz......haven't you learned anything from 2008 to now?

Its deflation that has come to the rescue of the housing market everytime....not more inflation by lifting things like minimum wages.....that only increases wages which puts more pressure on the RBNZ to hold interest rates higher, not lower.

You should be praying for deflation to come to the rescue again so that we push the OCR back to zero and pump the system with more QE....

by J.C. | 23rd May 22, 1:03pm 1653267783

The idea of "inflating away the debt" only makes sense if incomes are rising. Income growth is benign. In fact, the ruling elite have been doing their best to suppress income growth.

by OldSkoolEconomics | 23rd May 22, 7:54pm 1653292474

Do we honestly believe the ruling had such a smart strategy and have been 'deliberately' suppressing income growth? Unfortunately i suspect they have (in the main) been merrily stuffing their pockets with as much cash as they can with no regard for the long term impact on anyone else or themselves (if society starts to fracture). Human nature tends to work that way

by unaha-closp | 24th May 22, 11:20am 1653348012

NZ elite strategy was very simple - low interest rates to inflate asset prices with massive immigration to suppress wage growth.

No one said it was a smart strategy.

by Von Metternich | 23rd May 22, 12:42pm 1653266558

Are the banks still lending to people with DTI over 4? Banks must be trying to recapitalize given how many loans may default given the jump in interest rates.

Do we have any statistics on the number of new loans as well as renewed mortgages given these circumstances? Cost of Living is up + Interest Rates on Mortgages are going to cause defaults.

Even with Labour's new First Home Loan Scheme, the banks aren't going to be willing to lend much even with the government guarantee if they expect the borrowers to be effectively underwater for a long time.

by malamah | 23rd May 22, 1:37pm 1653269879

Hard to find renewed stats - this page is useful though if you consider some 2020 and 2021 commitments to be refixing this year. As a percentage, various numbers have been floated however hard to make a call on how many mortgages from 2019 onward will be rolling over. The only stories I've heard about people being sensible and taking 3-5 year terms over the last two years have been a couple of comments on this site. I assume it's most of those rolling over but that's a guess.

by Averageman | 23rd May 22, 1:01pm 1653267712

Negative leverage coming to a house next to you. Everywhere.

by DTRH | 23rd May 22, 1:28pm 1653269327

Once the drop in house price’s happens anyone who purchased in last 5 years will see deposit gone and many will be in negative equity for years normally around 10 years to recover but because this is such a huge bubble could take longer.

by Hummy | 23rd May 22, 1:55pm 1653270944

Dtrh what is your thought about building supply cost. Labour. Can't see house price going down dramatically.

by lucenera | 23rd May 22, 2:16pm 1653272178

Pretty much not a problem.

look at this https://qorox.co.nz/

or this https://www.stuff.co.nz/life-style/homed/houses/124273042/forget-buildi…

When necessary technology is the medicine.

Less workforce is necessary, highly deflactionary, different building materials.

Yes, I can see houses to be very cheap... eventually

That house can be built with circa 10-15k$, again, eventually

by Jamin | 23rd May 22, 2:34pm 1653273241

Don’t worry, carters will buy the rights to this in nz and make sure the 3d printing material costs at least twenty times what it does in other countries.

by lucenera | 23rd May 22, 3:30pm 1653276658

ahahah

by Pa1nter | 23rd May 22, 9:35pm 1653298530

Printable housing has been largely debunked as vaporware, because all you're doing is printing walls - framing isn't a very large component of a build cost. You still have:

- roof and gutters

- plumbing

- electrical

- bathroom and kitchen joinery

- heating/aircon

- glazing

- internal doors and architraves

- flooring

- plaster and paint

- landscape and decking

And you have to do all that with a totally new house construction.

Really if the government wanted to be serious there'd be a factory pumping out 6-10 prefab designs of completed housing and then relocate onsite.

by Carlos67 | 24th May 22, 8:55am 1653339312

Actually the biggest problem in New Zealand is that everyone wants a "Bespoke House". Some companies even target "Cookie cutter" houses as a bad thing. The problem is if a decent designed "Cookie Cutter" house was 25% less to build due to volume construction then I'm sure they would sell like hot cakes. It should be noted that it also must be far better and faster for builders to keep building the identical house than keep building something new every time.

by In Vino Veritas | 24th May 22, 3:02pm 1653361322

I dunno Carlos, the Government tried "cookie cutter" houses and it was an abject failure as they were priced off the market for the people they were targeting. ROFL.

by CapitalNone | 23rd May 22, 2:16pm 1653272184

Maybe the price of land under the house will take the biggest hit.

by DTRH | 23rd May 22, 2:52pm 1653274373

Hummy it’s happen all over world many times, cost of land will have to take a haircut builders are earning more than nurses and sometimes more then doctors way over priced. In the next downturn people will happy to have a good job with fare wage, it is just crazy that house prices in Auckland are 12 x average couples wage for a tiny house.

by Uncle Bulgaria | 23rd May 22, 3:04pm 1653275054

My DTI isn't much over 3 and my rates are low. I am not heading underwater any time soon but I really can't save much at all. I simply don't understand how people can survive on these DTI's.

by Carlos67 | 23rd May 22, 3:23pm 1653276226

You guys need to stop dreaming about a DTI of 3 to buy a house, its never been 3 for the last 40 years. I couldn't even afford to borrow enough to buy a Auckland CBD Nelson Street shoebox pitch black without the lights on apartment without a carpark back in the day on 3 times which was the max lending rule at the BNZ back in the day.

by RickStrauss | 23rd May 22, 4:33pm 1653280417

One of my relatives bought their first house in Wellington ($125k) for a DTI less than 1, as a working couple. That was in the 1990s. They were on decent IT salaries after about 4-5 years of working.

Not even that far back in the day.

by Jamin | 23rd May 22, 4:46pm 1653281170

A guy from Shanghai came to stay in my air bnb before the pandemic. He said there property prices were about 20 times average incomes. He thought nz having about nine times seemed quite low.

Could be unraveling there now though.

by mfd | 23rd May 22, 4:47pm 1653281251

Ireland have a maximum generally allowable DTI of 3.5 (with banks allowed a certain % of the book above this, like our LVR restrictions).

What makes NZ such a failure that we can't provide this product at a price our population can afford? Why are Ireland so much better at this than us?

by blobbles | 23rd May 22, 5:07pm 1653282430

Because they have been through the crash and realised after they need to stop it from happening again. Our governments have refused to introduce a DTI because they love the ponzi. Their DTI came in around 2015 or something right? That was after their crash... ours is just beginning.

by J.C. | 23rd May 22, 5:15pm 1653282923

Our governments have refused to introduce a DTI because they love the ponzi.

Everyone loves the Ponzi. Govts, banks, home owners, retailers, airlines, Queenstown hospitality, Air NZ, craft beer brewers. Just getting started really.

by Carlos67 | 23rd May 22, 6:25pm 1653287135

Its your last chance J.C. to move your money out of the Bitcoin Ponzi into the Housing Ponzi. I know for sure where I would put my money, in fact its already locked in.

by Fitzgerald | 24th May 22, 7:37am 1653334677

This comment will not age well.

by Thats All Folks | 23rd May 22, 7:17pm 1653290230

Don't think we'll see a 3, but I think 4 - 5 is plausible.

by Let me be Frank | 23rd May 22, 8:23pm 1653294196

The affordability ratios are based on median income...not the income of approved borrowers.

it is another misuse of data like the test rate.....when it falls over everyone will claim it was unpredictable.

Bullshit.

by Dale Smith | 24th May 22, 9:31am 1653341470

There are a number of different affordability measures, but the ones 'the powers that be' chose to use are based on their ideology.

For example, the median multiple ratios based on income is used by Govts. that have the less restrictive land-use policies (which then also flow on to less restrictive consenting time, etc.). IE the ratio is not prescribed by decree but exists because the surrounding legislative environment naturally makes it so. These jurisdictions typically have median income ratios of around 3 to 5.

Whereas, the debt to income ratio, is a further restriction imposed by Govt. to try and counter their already restrictive land use and housing policies that created the eventual need for the debt to income ratio intervention. IE the Govt. policies create the problem, then they have to create another problem in trying to fix it. These jurisdictions typically have median income ratios from 8 plus.

Rather than fix the underlying structural issue, the Govts. the solution is to add another layer to try to stabilize it. For example, to give a housing analogy, it makes about as much sense long term in trying to make a house's weak foundations stronger by strengthening the roof.

by quality guy | 24th May 22, 4:35am 1653323757

One thing that no-one here has mentioned is the USA. Their monetary policy impacts NZ. They have almost 10% inflation, and there are calls for a 75bpt rise in the Fed funds rate in the June meeting.

NZ risk is importing inflation through a falling currency.

I think it's wise to assume our inflation peak is some way off. Possibly 12% by Xmas 22 or March 23. Note, the next inflation wave will be generated by food production shortages worldwide.

So to argue a 10% mortgage is out of the question is probably foolish.

The next 18mths will be very very interesting. If you can deleverage then do it now. Even consider selling and rent for the next couple of years.

Let the market return to normal levels and normal unemployment rates too. The key to determine if we are at the bottom is a mixture of both employment and inflation rate.

Hmmm 3% inflation

Hmmm 6% unemployment rate.

And a mortgage rates with a 7.

I think we will see 10-12% mortgage rates before this happens