Decision follows Minister of Finance’s request for more DTI and mortgage analysis
The Minister of Finance (Minister) and the Reserve Bank of New Zealand (RBNZ) have agreed to update their shared Memorandum of Understanding (MoU) on macro-prudential policy and add debt serviceability restrictions to its list of available tools.
The Minister agreed to add debt serviceability restrictions to the MoU on the condition that any implementation is designed to avoid impact to first-home buyers (FHBs) as much as possible.
In February, the Minister issued a formal direction (under section 68B of the Reserve Bank Act) to the RBNZ regarding house price sustainability when making financial decisions. It was separate from the Monetary Policy Committee’s monetary policy remit.
The Minister also requested more information and analysis on debt-to-income (DTI) ratios and interest-only mortgages. In response, RBNZ found that debt serviceability restrictions, such as DTI limit, were likely to be the most effective additional tool that the central bank could deploy to support financial stability and house price sustainability.
The central bank’s analysis also showed that the restrictions would mostly impact investors but have limited impact on FHBs. It also noted that it considers DTI limit a complementary tool to mortgage loan-to-value ratio (LVR) restrictions as they address different dimensions of housing-related risk. DTIs also reduce the likelihood of mortgage defaults, while LVRs mainly reduce losses to banks if borrowers default.
“Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels,” said Reserve Bank Governor Adrian Orr.
“We believe that a ‘sustainable house price’ is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates.”
The RBNZ will now work with the Treasury to update the wording for the MoU, which must be approved by the Minister. Over the coming months, it will also discuss with the industry the feasibility of implementing a DTI limit and other debt servicing restrictions as part of its financial stability toolkit.
“Any decision on implementing debt serviceability restrictions will be preceded by a full public consultation process, along with a Regulatory Impact Assessment,” the RBNZ said in a statement.
