With the house price slump at its end point, the focus is now shifting towards questions around a revival in the market. Forecasts range from a modest pick-up in prices to a 16% surge, with bullish predictions citing the recent spikes in net migration, the expected cuts in interest rates, and a drop-off in residential construction.
Those expecting the market to remain subdued highlight continued affordability constraints and the expected introduction of debt to income rules (DTIs).
CoreLogic chief economist Kelvin Davidson says not enough people are talking about DTIs, and like LVRs (loan to value ratios) and the CCCFA, both of which have been recently relaxed, the rules will have an impact on how much buyers can borrow and ultimately what they can pay.
Back in 2021 the Reserve Bank of New Zealand was granted the right to add DTI lending restrictions to its toolkit. The restrictions cap how much money a person can borrow based on a fixed multiple of their income.
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In April this year the RBNZ released the framework for the DTI restrictions and indicated that they could be implemented as early as March 2024.
Davidson said Kiwis were not paying sufficient attention to what DTIs might mean for them, and while there was no guarantee the RBNZ would implement the new rules, banks were ”definitely preparing” for them.
“I think we'll see them in March or April next year. The Reserve Bank will say, ‘Yip, we now have DTIs.’ That will be a pretty big shift, but March 2024 is nine months away, and people are worried about other things. We’ve got an election and whatever else in the meantime.”
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Davidson said imposing DTIs at a multiple of seven would likely limit house price inflation to 3-4% per year compared to the 6-7% that homeowners have traditionally come to expect.
When Davidson explained DTIs to recent property investor event, the topic “cannibalised the whole session”, he said. “People were saying, ‘Hang on. What? WHAT?’.”
While LVRs also have the potential to restrict buyers, they were more about protecting the banks, rather than protecting borrowers, Davidson said.
With LVRs, homeowners and investors can extract new deposits from equity when house prices rise, but with DTIs they’ll still need to meet strict income requirements before they can borrow. “Under a DTI system, it’s all about your income, and you can't change that easily. That's a distinction that maybe people don't quite cotton on to,” Davidson said.
DTIs, he said, would limit the number of homes any given individual could own. “Somebody who's already tapped out on debt won’t be able to get another property until their income has grown. The Reserve Bank has done heaps of modelling and says it could be five, seven, 10 years until somebody can buy the next one.”
If DTIs are introduced next year, the big question will be which income multiple will they be set at. “The Reserve Bank indicated maybe seven, but that’s still up for grabs. We don't know where they're going to be set, whether it’s seven or eight, or 15.”
There are likely to be some exceptions to the DTI rules. The Reserve Bank has indicated that banks will be able to lend about 15% of their total mortgages outside of the DTI limit, and that borrowers looking to purchase new-builds are likely to be exempt, as will non-bank mortgages from finance companies and other alternative lenders.
CoreLogic chief economist Kelvin Davidson: “Under a DTI system, it’s all about your income, and you can't change that easily.” Photo / Peter Meecham
Davidson said DTIs were unlikely to have an immediate impact on borrowing, but they would limit the size of the next housing market upswing. “High DTI lending is already under control. At the peak of the market, about 40% in loans to investors were going out at a high DTI. That figure now is around 10% and that’s a function of house prices falling. You don’t need as much debt and incomes have gone up. So the ratio is more favourable.
“It’s more about the next cycle. This is about the Reserve Bank saying ‘We don’t want to see another 40% rise in house prices’ and about tying house prices much more closely to income over the long run.”
Infometrics economist Gareth Kiernan said high interest rates would limit the impact DTIs on the market. “At the moment, the lift in mortgage rates since late 2021 is effectively constraining the amount that banks are willing to lend to people relative to their income anyway. People’s ability to service a large mortgage is much less than when mortgage rates were 2.5% and test rates were 6% in 2021,” he said.
“As a result, any DTI restrictions would probably have little effect on the amount of lending getting done and, by implication, house price outcomes.
Reserve Bank governor Adrian Orr. The bank has said in April it would give banks 12 months to prepare their systems for possible implementation of DTI restrictions. Photo / Getty Images
“The Reserve Bank’s consultation documents suggest the effects might be greater on investors’ potential to borrow, so DTIs might lead to a step change in the amount of investor borrowing occurring. But I wouldn’t expect that to have a sustained effect leading to improved housing affordability, in much the same way that LVR restrictions have had temporary effects on the market, but have not led to a sustained improvement in housing affordability.”
Kiernan said the key to housing affordability was supply. “Until supply-side impediments are alleviated or overcome, no amount of tinkering with demand-side factors is going to fix the affordability crisis,” he said.
Opes Partners economist Ed McKnight said DTIs would further tip the balance for investors towards new-builds. Investors were already leaning that way thanks to lower LVRs for new-builds and the fact they can still deduct interest costs on new-build investments.
McKnight said the spectre of DTIs was pushing some investors to bring forward purchasing decisions.
“There are a number of investors who have approached me and said, ‘We are going to buy now, before debt to income ratios come in.’ They see an opportunity where house prices on average have gone down about 18% in New Zealand. So they're saying, ‘We're near the bottom of the market, I can get a good price today and in 12 months’ time, I might not be able to buy a house, or I might not be able to buy an investment property because the debt to income ratios are going to come up.’”
