The Reserve Bank of New Zealand has introduced new rules governing how much house buyers can borrow while at the same time loosening deposit restrictions.
The heavily signalled debt-to-income (DTI) ratios will take effect from July 1, 2024 and are aimed at reducing the build-up of unmanageable debt.
Under the new rules, home buyers will, in most cases, be unable to borrow more than six times their pre-tax income, while investors will be restricted to seven times their pre-tax income.
Deputy RBNZ governor Christian Hawkesby said: “DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt.”
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The RBNZ said banks had been given 12 months to prepare for the introduction of DTIs. There will be exceptions to the rule, with banks allowed to make 20% of their lending outside the restrictions.
The RBNZ also announced it was loosening loan-to-value ratio (LVR) rules, benefiting low-deposit buyers and investors.
From July 1, the percentage of loans to owner-occupiers with less than 20% deposits will be raised from 15% to 20%. The percentage of loans to low-deposit investors remains the same at 5% but the amount of capital investors need has decreased from 35% to 30%.
CoreLogic chief economist Kelvin Davidson said DTIs and looser LVRs were not a surprise as they had been on the table for some time.
“The settings are no different from what the RBNZ had originally suggested. And banks are currently lending way below that 20% speed limit. High mortgage rates are already stopping people from taking on unmanageable debt so buyers are unlikely to worry about DTIs,” he said.
The Reserve Bank headquarters in Wellington. Under the new RBNZ rules, buyers may not be able to borrow as much as they previously might under the new DTI rules. Photo / Getty Images
“But interest rates won’t be 7% forever, and when they go down DTIs will have an impact. The key thing is that DTIs tie house prices more closely to income and reduce average house price growth from 6% to 4%, which will help with housing affordability.
“DTIs will have more of an impact on investors. From July 1, they will only be able to buy when their income goes up. That will limit the speed at which they expand their portfolio. In the past, they may have bought a house every one or two years. Now it might take five or six or seven years before they can buy again.”
Davidson said first-home buyers were less likely to over-commit on a mortgage right now, having seen what had happened to those who bought at market peak when interest rates were low.
“First-home buyers will probably know of people who did over-stretch. Those stories get around. However, first-home buyers tend to react to what’s in front of them, not behind – and at the moment they face less competition from other buyers and prices are lower.”
Other housing market experts OneRoof spoke to agreed there was more caution in the market right now. Broker Gareth Veale, of EasyStreet Mortgages, said first-home buyers this year were “absolutely” more worried about debt than those who were borrowing in 2020 or 2021.
“Previously, a young couple could have an income of $150,000 to $200,000 and could afford a huge mortgage at a 2.5% to 3% interest rate. People did stretch themselves and mortgages of $750,000 to $800,000 were common.
“I have clients who bought a property in Wellington for $1.9 million, with a 10% deposit at the height of the market. The latest value of that property is $1.5m. They are bureaucrats with a combined income of $400,000 but they’re now struggling because it’s a huge amount of debt and they’re in negative equity.”
He said the proportion of household income servicing mortgage debt now was “so high” buyers were lowering what they were willing to spend. “I’m meeting clients and saying, ‘Hey look, you can afford this’ and they’re like, ‘No, we can’t’. The bank is telling them they can afford $800,000 but they’re saying no.”
Kiwibank chief economist Jarrod Kerr: "I think if we get rate cuts from the Reserve Bank, that'll kick-start the housing market in 2025." Photo / Supplied
Kiwibank chief economist Jarrod Kerr said that while first-home buyers were still active in the market – they accounted for 26% of new mortgage lending this year – higher interest rates had made them gun-shy.
“We have been through a correction since the 2021-2022 madness. That was unsustainable, and it got way too heated. Since then interest rates have tripled so that’s forcing people to think about how much [debt] they’re willing to take on. That caution I think is being forced by higher interest rates,” he said.
“In 2021-22, you could get mortgage rates of around 2.5%, which was extraordinary in itself. People made decisions based on those rates. They thought, ‘Yeah, I can afford that’. Sure, banks tested them. We asked, ‘Hey, can you pay 6%’, and, of course, everyone said yes. And then they woke up a year-and-a-half later and interest rates are at 7%.”
Kerr said it was important for people to realize that house prices can go down as well as up. “There’s this idea that property prices only ever go up. We’ve been through a correction, and it was painful, but more often than not the housing market is at least stable to rising. That’s what we’re going to see this year, and that’s what we’re going to see next year. We expect house prices to start lifting by the end of the year, to gain momentum over the rest of the year. I think if we get rate cuts from the Reserve Bank, which will be the big story for later this year, that’ll kick-start the housing market in 2025.”
Claire Williamson, of My Mortgage, said that while first-time buyers were a bit more cautious, they weren't facing much competition in the market and had more power to negotiate. “Vendors are more realistic about what prices they can achieve," she said.
Williamson said DTIs wouldn't have been a big surprise. "They were already built into the back-end of many bank calculations, so for most borrowers, they aren't going to change all that much."
She said mortgage affordability was influencing the amount people were prepared to borrow. “Most of the time the conversation is around the deposit and the amount they can borrow based on what they want to pay. So we're not saying, ‘Hey, you can borrow $800,000’ but instead saying, ‘Hey, how much per week would you like to pay and what's comfortable for you?’."
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