Industry expresses concern on debt-to-income multiples
House prices in New Zealand continue to soar – with the national median house price hitting an all-time high last month, which means the size of the average home loan would most likely continue rising, according to the Reserve Bank of New Zealand (RBNZ).
Data from the RBNZ revealed that over 40% of first-home buyers (FHBs) in June took on debt five times greater than their annual income. Of the $1.09 billion lent to FHBs in June, $446 million went to households with debt-to-income ratios greater than five, and $146 million went to households with debt more than six times their yearly income.
Hugh Pavletich, the co-author of the annual Demographia international housing affordability survey, said he is concerned about the “grossly excessive” debt-to-income (DTI) multiples in New Zealand as the country’s DTI levels are “hugely dangerous,” especially for first-home buyers.
“I find it insane that the banks are lending at multiples of 5.5 times to eight times household income. People shouldn’t be paying more than three times household income to house themselves, with a 2.5 times income mortgage,” Pavletich said, as reported by Stuff.
“Loading young people up with grossly excessive debt is simply callous and contemptible. It is destroying people’s lives, getting them committed to these multiples.”
Meanwhile, ASB has taken steps to prevent DTI ratios from getting out of control. In September, it started capping high loan-to-value ratio (LVR) mortgage borrowing at six times the annual income, according to Stuff.
ASB said it introduced a DTI test as people access “higher levels of borrowing.”
“We are mindful of the need to carefully consider the impacts this could have on our customers’ financial position over the longer term,” the bank said, as reported by Stuff.
Independent economist Tony Alexander confirmed that the RBNZ “wants to, and almost certainly will” introduce DTI tests, with the rules containing borrowing for highly-geared buyers.
