After years of political opposition and scepticism, the Reserve Bank (RBNZ) looks set to implement debt-to-income (DTI) ratio restrictions on banks' mortgage lending with the cautious support of New Zealand’s two main political parties.
In an email to Interest.co.nz, Finance Minister Nicola Willis said she had been briefed on the RBNZ’s consultation, but it wouldn’t be appropriate for her to comment on the specifics. DTI restrictions limit the amount of debt borrowers can take on relative to their income.
“One of the bank’s main objectives is protecting and promoting the stability of New Zealand’s financial system. I have been advised that the measures the bank is consulting on are intended to deliver on that objective,” Willis said.
Just over two years ago, the National Party’s shadow treasurer, Andrew Bailey, was criticizing the Labour Government for considering the restrictions.
The outcome of the policy should be obvious to anyone with “even the most rudimentary understanding” of banking, he said in a 2021 press release.
“The first people banks will cut lending to are those on low incomes, making it even harder than it already is for first home buyers to get onto the property ladder”.
He said it showed that Labour’s Finance Minister, Grant Robertson, couldn’t “kick his addiction to counter-productive meddling in the housing market”.
This was somewhat ironic, since a few years earlier Robertson was in opposition and was putting out press releases criticizing the National-led government for considering the restrictions.
“Blanket debt to income ratios will cause widespread damage and almost certainly have unintended consequences,” Robertson said in 2016.
“Along with building more affordable homes through KiwiBuild, Labour would focus on cracking down on the speculators, not punishing first home buyers”.
Facts change
Speaking to Interest.co.nz on Wednesday, Robertson said he was convinced that debt-to-income ratio restrictions could be needed after the 2020 housing boom.
The Reserve Bank actually removed its loan-to-value ratio (LVR) restrictions during the covid crisis as part of its efforts to ensure the economy didn’t slump into recession. Instead, investors rushed to take advantage of low interest rates and a speculative bubble sent house prices soaring — only to slump when monetary policy was tightened.
In December, the RBNZ published a note reflecting on its regulation during the period. It concluded that debt-to-income restrictions would have helped protect borrowers.
“Anchoring debt levels to income could have added to borrowers’ resilience to servicing difficulties from higher interest rates, which LVR restrictions were largely unable to do because they target a different type of risk,” it wrote.
Robertson ultimately gave the Reserve Bank permission to use the tool in June 2021.
On Wednesday, he said it was better to have the tool ready to go, if it was needed, as it couldn’t be suddenly switched on in a crisis.
Non-binding settings
The new regulation will be first applied with loose settings that are unlikely to restrict borrowing in the current economic environment.
Robertson also took “some credit” for the differentiation between owner-occupiers and investors, who will face different DTI restrictions.
The RBNZ has proposed restricting banks from lending more than 20% of their loans to owner-occupiers and investors with DTI ratios above six and seven times their income, respectively.
A research note by ANZ economists found the proportion of lending above these proposed limits peaked at over 35% for owner-occupiers and over 40% for first home buyers in 2021.
“While first home buyers are not explicitly targeted by DTIs, they will be more affected simply because of the fact that first home buyers typically require more borrowing than people who are upsizing or moving,” they wrote.
ANZ, the country's biggest mortgage lender with more than $105 billion worth of exposure, said the new limits were unlikely to have much impact on lending this year. They have been pitched as “guardrails” that will only become binding in a future housing boom.
50 Comments
Kiwibuild was obviously a massive failure, but i disagree with the judgement about the “cracking down on speculators” outcome. Removing interest deductibility was a nuclear bomb for highly leveraged property speculators, it was already causing large disruptions as it was being phased in at 25% and then 50% currently. If it was going to hit 100% removal as intended, I think that would have indeed been a back breaker event for property speculators. But the new government has saved their collective butts, and once full interest deductibility is re-enactied the speculators will be as lively as ever.
And FHBs are now the largest buying group with OOs and rentiers behind them.
I wonder whether interest deductibility will get back to 100%. The first move is to 80%?
There are good economic and tax fairness reasons for keeping it less than 100%.
Both rentiers and OOs get an economic benefit to owning a house. (e.g. OO don't have to pay rent but there's a bit more to it than that. Anyway ...)
At 100% deductibility, the rentier gets a slightly greater economic benefit than the OO. Thus somewhat less than 100% deductibility balances this out. Where it doesn't balance out is that increased demand from the rentiers pushes prices up, so even less again is warranted.
Overseas, other tax regimes have less than 100% deductibility and/or give tax breaks on interest paid to OOs to even things up.
NZ (is anyone surprised) is way behind the rest of the world in balancing this up.
"Removing interest deductibility was a nuclear bomb for highly leveraged property speculators, it was already causing large disruptions as it was being phased in at 25% and then 50% currently. If it was going to hit 100% removal as intended, I think that would have indeed been a back breaker event for property speculators"
The policy setting of equalising tax treatment of interest for non owner occupier buyers with occupier buyers in the existing house market needed more time to work.
Do we as a society want to see more owner occupier owners or more non owner occupier owners who are speculating for non taxable capital gains? There are other non financial benefits of increased home ownership by owner occupiers.
Many non owner occupiers have a goal of owning 10 residential properties - let them own 10 residential properties by building them all, rather than competing and frequently outbidding owner occupier buyers in the existing residential property market. The policy settings of the previous government incentivised that for non owner occupiers.
The policy settings of 100% interest deductibility for purchasing properties in the existing residential property market has resulted in the lowest levels of home ownership by owner occupiers in decades in NZ.
https://tradingeconomics.com/new-zealand/home-ownership-rate
For the last people in NZ you will be lucky to have a home to turn the lights out in. The smart money invested, then pulled the ladder up so only they could have and increase a portfolio and now have nice homes in countries with better functioning health systems,... or they became MPs and could get free housing and fully paid private healthcare (with a preference for queue cutting) paid by the taxpayer.
Only those with no other option choose to stay in NZ and only those who literally are forced to live here will remain with steeply degrading healthcare. Any baby boomers still here will be mostly for the free money but once they need better healthcare that financial metric will go swiftly the other way towards countries like Aus, UK and even the US (yikes they are still decades ahead of us). Staying with worse healthcare is a choice to die young and prematurely of preventable causes. Many these days die younger than retirement age in NZ of preventable and treatable illnesses but were neglected by the health system. The future gens will need to admit there is very little reason, (outside of older family providing free childcare services), to stay. In essence yes we are above third world but even third world countries have much better healthcare services than NZ now and the cost of housing is beyond reasonable. At best we are not in a civil war, compared to other nations, and there is less criminalization of identity & relationships (e.g. mixed religious relationships, mixed class relationships etc), but still much less equality than other OECD nations on most major metrics.
"...but still much less equality than other OECD nations on most major metrics."
?
Yet all the Brits I talk too including my wife say our health system is way better than the NHS which is failing . Also you ever compared our cost of health care to the US wereby a third of its citizens can't afford any at all least everyone here from the poor to the ultra rich get the basics go buy medicine in the US unsubsidized system
Healthcare systems are near the end of the energy surplus industries. We can afford to have very good ones when we have energy surplus, to take care of aged/sick people. As energy surplus dwindles per person, so will healthcare systems, forcing us to have health care systems which will be a shadow of their former selves and focussed only on critical care. PDK talks about triaging, healthcare of course is where the term comes from, dealing with the most dire needs first and if there are resources left over, dealing with others after. This will be felt in us developed countries first as healthcare only becomes affordable for the wealthy, services start failing in small ways first (we are here, so is the UK), then in bigger and bigger ways as resource competition really kicks in.
Here are the actual facts according to Forbes Study. I would conclude that likely more Kiwis skip seeing a Doctor due to costs than is the case in the US
Health Insurance Statistics
· An estimated 8.4% or 27.6 million American adults didn’t have healthcare coverage at some point in 2022. [1]
Healthcare expenditures per capita averaged $10,191 in the U.S. in 2020.[2]
· Total national healthcare expenditures reached $4.3 trillion in 2021, slightly higher than in 2020, when expenditures totaled $4.1 trillion, and significantly higher than pre-pandemic healthcare expenditures which totaled $3.8 trillion in 2019.[4]
· Hispanic and Black working-age adults were less likely to have healthcare coverage than White/Non-Hispanic or Asian adults in 2022.[3]
· United States health insurance statistics show that Americans are worried about how much health insurance costs and being able to afford healthcare. Of the expenses adults are most concerned about affording, medical bills ranked second to gasoline and/or transportation expenses.[2]
· Cost is preventing people from getting care—8.7% of adults reported not seeing a doctor in 2021 because of the expense.[2]·
· Preferred provider organizations (PPOs) are the most common type of health plan for covered workers, followed by high deductible health plans (HDHPs).[2]
· The top three leading causes of death in 2021 were heart disease, cancer and Covid-19.
Jeez pacifica, you have a jaundiced view of Boomers (as bad as JC) as well as a very weak understanding of international immigration/welfare rules.
But getting back to DTI's, if applied well they can have a much better effect on limiting investment house portfolios and, thereby, restricting an escalation in house prices. DTI's should be good for first home buyers also, who would be less likely to get trapped in the financial mire associated with rapidly rising mortgage rates not being matched by rising incomes, as we have seen here recently.
Actually it is facts, directly taken from stats NZ. But I guess we can discount certain classes of people from existence to suit your world view if they are poor enough. The DTIs have been incredibly harmful to get housing for young poor families to live in but it has made it easier to borrow for investment properties which produce income for those already with housing. Even today it is much harder for those on median incomes to borrow for housing in the cities in which they work. The banks often implement rules that are harsher than the government of the day advertises they originally intended. Kiwibuild was designed from the outset to be inaccessible and unaffordable. There was always a fairytale of marketing around it though for the lucky winners.
How many of these are preventable through lifestyle? None. None of those are causes of death. But then fun fact all your "preventable through lifestyle" things should have adequate medical health treatment e.g. a person with an untreated eating disorder still needs medical support and treatment to recover from an eating disorder. Obesity is a symptom caused by many conditions: thyroid, hormonal imbalance due to cysts & cancer, cancer growths, ascites, autoimmune, organ diseases, eating disorders etc. Drug use is an addiction which already is known to need medical support and intervention, none of which is widely available to over 25% of the population. Ever tried to get a placement for suicidal family these days in a crisis center or addiction support, or eating disorder support? How about medical treatment for non RRMS? We know mental health support is in the crapper and getting worse in NZ but your ignorance and assumptions only go to prove why that is still the case. Also fun fact more people die young and in a shorter space of time from being medically underweight due to eating disorders than the reverse. We really do need more funding to stop deaths of those with eating disorders underweight which is far more harmful to the internal organs in the short term. Sadly many do die from organ failures and diseases which affect organ function. Do we have data for this, yes we do.
Also fun fact a preventable death from a treatable condition above the age of 65 is still a preventable death from a treatable condition. We don't cut off medical care to those over 65 by default no matter how much you want a Logan's Run style society where we can just ignore & neglect everyone over 65. But sure lets call all deaths over 65 "natural" does that make you feel better that you can die from neglect & sepsis simply because you could not access the medical care to treat it but most society will ignore that injustice because you are seen as being old and should be dead? Turn the tables how would you feel if that bias was instead applied on income basis lines (like we have today) or racial lines (like we have today) on gender lines (like we have today) or ability and access lines (like we have today). All data recorded and proven by Stats NZ, Te Whatu Ora, & reported on through NZ doctors. Sure lets just ignore the body of evidence from medical professionals, that always goes well.
The smart money works and gets on the ladder if they wish.
My son started working at 16 doing crappy gardening nobody else applied for, delivering pizza to those who couldn't be assed to cook etc.
School, uni and working five days a week with no alcohol or parties.
Now 24 with $110K saved, a top notch job, and no help from Mum and Dad except basic values.
So many others find it easier to whine than to work.
Eh, that's okay I guess. But in my day 24 could have a house already with a small mortgage and without much financial stress.
It's nice that we can pretend that mathematics are irrelevant and that it was only ever hard work that got people ahead, but that's obviously just pretend. Older generations benefited from affordable housing previous generations' policy and taxes created, and now benefit from younger generations' provisions for them too. So many of them still find it easy to whine on talkback radio, too.
"But in my day 24 could have a house already with a small mortgage and without much financial stress. "
Which day was that ? I'm 68 & bought my first home at 23 - after 7 years full time work- - with 3 mortgages (cheapest was at 15%), 10% deposit - & working 3 jobs to pay for it.
Not much stress, yeah right.
Entire families are now moving to Australia, thanks to citizenship now being available to all after 4 years. Saw one group saying that the parents (in their 50's), all 4 adult children, a son-in-law, and the grandchildren were all moving to Australia. The days of only those who were young and unencumbered moving to Australia have gone, now its everyone who just wants out of here. Race-based access to healthcare and education is a clear driver for people to leave NZ.
An "independent" institution whose primary role is financial stability, not only does not comprehend financial stability (see last 20+ years), but needs permission from politicians with even less comprehension and a higher level of vested interests.
The different rates for FHB's and investors is also very telling.
The Reserve Bank actually removed its loan-to-value ratio (LVR) restrictions during the covid crisis as part of its efforts to ensure the economy didn’t slump into recession.
And 2 years later it wants to engineer a recession.
And it would seem we do need one. Not just to reset prices and the "value" of money, but to reset humanity's values.
Those invested in property will undoubtedly complain. Nevertheless, this policy is a good thing for NZ society. In the long term it will reduce unsustainable borrowing and the risks in the system, smoothing over the ups and downs in the long term.
I am pleased the current government has bought into it.
As a property investor I see DTIs as personally beneficial. They can have the effect lowering interest rates and raising rents. It also means I won't have to compete with low income FHBs when bidding on lower quartile houses.
The unintended consequences of DTIs are terrible for NZ as a whole.
LVRs make sense for stopping banks crashing. DTIs not so much
The effects of DTIs depend entirely on the settings applied. Those proposed this week will have little effect, however once in place could easily to changed to something more impactful if required. I’ll be pleased to see them in place and binding as they will moderate the rate of price changes and reduce speculation on a limited but vital commodity whose primary purpose should be to house people rather than provide a quick buck.
I’ve followed Ireland for a long time. After astronomical boom from mid 90s till 2007, followed by an even more dramatic bust, the central bank brought in strict DTIs (4 for FHB and 3.5 for everyone else), and prices have remained quite stable since - slow steady increases with reasonable affordability
I was talking about the stated outcomes. Financial stability, boom bust of credit cycle. That all ended for NZ in 2013 with the controls brought in then. Rather than raising interest rates the guvna started pulling the LVR lever
BTW if anyone thinks they can control house prices through restricting who can buy they are sadly in denial.
"BTW if anyone thinks they can control house prices through restricting who can buy they are sadly in denial."
Made me chuckle. It's complete nonsense. But still funny. (I guess you are referring to a city in NZ over shorter time? Look worldwide, and over a few hundred years.)
I guess it could be a net benefit to investors buying their first property or two, thanks to the higher proposed DTIs.
Once you go beyond that, your non-property income gets stretched thinner and thinner. A DTI of 7 means a maximum loan of about 40% on a new property unless supported by outside income.
"The unintended consequences of DTIs are terrible for NZ as a whole."
However the intended consequences of DTIs are critical for NZ as a whole - i.e financial stability of the banking system.
The short and long term consequences of financial instability and loss of confidence in the banking system have been shown in history.
Financial stability of the banking system for the vast majority of the population should have a higher priority over easing access to credit for a small proportion of the population ( i.e highly leveraged borrowers).
Certain groups have chosen to politicise DTI measures for their own vested financial or political interests.
The intended and unintended consequences of the present and recent decades policy have been terrible for NZ as a whole. Some who benefited from it perhaps think they can protect themselves and their families from the consequences of it with the wealth they've hoarded, but that seems unrealistic. We still have to live in the society we've created. Unless you emigrate.
Rental income is often higher than a families considered available income for a mortgage when they are applying for one. Plus there are even more benefits if you buy as a company versus just as an investor. However it can be harder if you fail to build up enough equity on properties for the next one but Good News: Labour spiked the housing market last term so most properties increased in value to a significant degree, so much so that the cool down of the last year did nowhere near reverse it.
Only a 100year flood could truly wipe out the value & benefits of those investment properties but that affected few properties and even fewer were uninsured. The last govt promised buy outs quite near the market value for many properties who were uninsured regardless (which is damning because many more properties are being switched to high density housing & consented in the same areas like there is a drive to increase the housing market no matter the cost to the public in the interim). Lets take a gander at property values & sales in known flood plain areas. Even if we go far outside the Aucks, Welly markets to smaller cities the property value increase on flood prone land & purchase by multi property owners is confronting as no median income family could afford them with the DTIs without a significantly large unrealistic deposit. See how well each new government & insurance co responds to floods. It is nail biting stuff. It does mean those facing denials by DTIs or lack of housing options will be predominantly OO and not investors. This plays out as we still have a significant housing crisis for families with a single average income, and ones on & below duel median incomes.
Won't DTI's make it harder for first home buyers and easier for investors to purchase property? Banks are already pretty thorough at checking if you can service a mortgage, and the LVR helps. Seems like there are a few property investors among the RBNZ and our politicians.... I think we should be focussing on supply and limiting the amount of investment properties one can have...
There is good news that a higher % of first home buyers are currently entering the NZ housing market...
https://www.1news.co.nz/2024/01/25/first-home-buyers-set-new-property-m…
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I hate to be the bearer of bad news...lol But I think its a train crash...lol...there ive said it...I see folk hopeful of OCR reductions and DTI limits etc etc etc...(grasping at straws) but reality is RE unaffordability is here and everyone wants to pretend the monstrous compounding ELEPHANT in the room is a small feeble 3 legged mouse...lol...Because the RE industry is so complex it is likely theres only 2 paths to sort it...1- increase supply markedly and rapidly with design approved quick offsite kitset builds (plug and play) ... or 2- raise mortgage lending rates continually...neither is favorable to the RE gamblers, so its consistently rely on imported wealth to displace the ever growing list of hopefuls.....and that significantly adds to the local (crisis) problem....lol 12.5%OCR...lol....
Saw an estimate recently that by 2050, not really that far away, 50% of retires will be renting . Don't know the parameters of the study but that would result in very few having wealth. Lotto seems a good bet for kiwisaver funds at 65/67/70. Win you get to live in a house, lose you get the underside of a bridge.
Its great, it will keep the middle class in their place, by not allowing them to "stretch" to buy a house in a good school zone, making those areas even more elitist than they are now. Also great for landlords with rentals in those areas, as rents will go a lot higher as desperate parents now "stretch" to pay rent rather than a mortgage. Its either that or buy a house in the cheap areas you can afford and consign your kids to the local low decile school where they spend all their time doing kapa haka instead of learning to read.
It’s madness that investors are able to borrow with more ease than owner occupiers. The best thing labour did was remove interest deductibility. Although now it is back on the table, if the Auckland Property Investors Association can be believed landlords will surely pass on these reduced costs to tenants by lowering rents. What an absolute crock. Rents are divorced from actual expenses, they’re always set at maximum what tenants can possibly pay. We didn’t see rents drop during times off record low interest. We need a home ownership target. Why won’t any government set one.
12% of the working age population is on a benefit. That's why home ownership has fallen over the years. If you want to own a house, try turning up to school every day, focus on getting an education, then get a job, and save your money instead of spending it on alcohol, drugs, gambling, and takeaways. Its not that hard.
So it follows investors should find it easier to borrow? I beg to differ. Most young people I know not in their own homes are just as hard working as previous generations. The ones I know who do own often had parents gift them huge sums to get onto the property ladder. Certainly not entirely on their own. Sheer dumb luck does not make them any harder working. My parents never bought a house so were in no position to help. It’s earning well over 150k that made it possible. That shouldn’t be what it takes to do it without breaking your back.
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