COMMENT: Back in June the Reserve Bank announced that the Finance Minister, Grant Robertson, had agreed to in principle to let the bank introduce “debt serviceability restrictions” to mortgage lending in New Zealand.
At the time Robertson said he was supportive of debt-to-income ratios “on the condition that any implementation is designed to avoid impact, as much as possible, to first-home buyers”. The Reserve, in response, said it was not planning to introduce the restrictions immediately, adding that it might take six months or more to properly implement.
However, it argued that debt-to-income ratios were “the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability”.
Both the Government and the Reserve Bank were already waiting to see if separate measures announced earlier in the year put the brakes on house price growth, and it’s clear that six months down the line the measures have, as I predicted, have had very little impact on the market, with house prices continuing to rise.
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Just in case you’re not familiar with DTIs, it’s worth recapping what they are and how they work. They are a particularly nasty tool, which at a macro level try to regulate lending in the housing market by creating an artificial ceiling on house values. They do this by limiting the amount a borrower can borrow to a multiple of their income – the Reserve Bank was proposing seven - which means that a couple on the current New Zealand median household average income of $102,500 would be limited to borrowing a maximum of $714,000 (seven times $102,500). Assuming that couple also had a 20% deposit of $142,500 these rules mean that their house buying budget would be restricted to about $856,500, just enough to buy a small shack in outer Auckland.
Ashley Church: “DTIs try to regulate lending in the housing market by creating an artificial ceiling on house values.” Photo / Ted Baghurst
The theory is that by limiting what a purchaser can spend, the ratios constrain house price growth but, as I’ve argued before, this is naïve thinking because it fails to account for the large number of Kiwis without mortgages and those with significant equity in their homes.
So I was disappointed to learn last week that BNZ had decided to introduce DTI restrictions ahead of any announcement by the Reserve Bank, following earlier moves by ASB.
I’m not quite sure why BNZ and ASB think it is a good idea to introduce these restrictions prior to a mandatory imposition, but individual banks have the right to do whatever they wish in a competitive market and, currently, there are still other choices for those who don’t like the new policy.
So, for now, debt-to-income rules are still not a compulsory feature of the market – although, earlier this week the Reserve Bank confirmed that it is preparing to consult on the use of this tool so it’s clearly now only a matter of time until they’re used.
Once that happens, first home buyers, the very group Robertson wants to protect, will be pushed even further out of the market. And new property investors will be limited to existing portfolios, putting further pressure on the supply of rental accommodation over the next few years; which means tenants will end up paying more, which in turn will curb their ability to save for a deposit.
Meanwhile, house prices – the very thing that this policy will be introduced to reduce - will continue to climb, unaffected by yet another futile attempt to control the housing market.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
