Economist explains the implications of debt-to-income rules
The Reserve Bank has recently opened the floor for submissions until March 12 on its proposed introduction of debt-to-income (DTI) rules for bank lending on residential property. While the exact commencement date remains unknown, an announcement from RBNZ is expected around the middle of the year.
Independent economist Tony Alexander, in an analysis written for OneRoof, explained that the proposed rules suggest capping banks’ lending to a maximum of six times the before-tax income for households seeking a new mortgage. For investors, a slightly higher limit of seven times income is proposed. However, in both cases, banks can still have a maximum of 20% of their new lending exceeding these limits.
Alexander predicted that the impact of these rules may not be immediately evident in the housing market until the next boom arrives.
Based on Reserve Bank data spanning the last six months, a mere 7% of recent lending to first-home buyers surpassed the proposed limit of six times their income. The corresponding figures for other owner-occupiers indicated a 10% proportion exceeding the limit, while investors saw 8% surpassing seven times the income threshold.
“Looking at those low percentages, which are well away from 20%, you might think there is no point having the rules. Not so fast,” Alexander said.
The economist drew attention to the experience in the New Zealand housing market during the 2020-21 boom. At its peak, new lending to first-home buyers surpassed six times income and stood at 28%. Similarly, for other owner-occupiers, the peak reached 36%, and for investors, it surged to 37%.
“It is when things boom that the new DTI rules will become binding and the impact will be to restrict the pace of house price growth,” Alexander wrote. “This will help reduce the risk of households taking on excessive debt and potentially being caught out badly when conditions change. In this way DTIs will limit both the booms and the busts.
“But they will probably also lengthen the period during which prices rise at a firm pace (let’s say 10-15% per annum rather than 20%) as frustrated buyers have to wait for their deposit to grow before making a purchase.”
Yet, in a surprising turn, RBNZ intends to ease LVRs simultaneously with the introduction of DTI rules. Banks may be allowed up to 20% of new lending with deposits below 20% of the property value for owner-occupiers, a noteworthy increase from the current limit of 15%. Additionally, the proposed minimum deposit for investors might be reduced from 35% to 30%.
For first-home buyers, this shift could be a game-changer. While high-interest rates currently impede purchases for many due to elevated debt-servicing proportions, the key obstacle for numerous young buyers is the struggle to accumulate a sufficiently large deposit. The potential increase in bank lending with less than a 20% deposit could significantly benefit first-home buyers, Alexander said.
“When the DTIs come in, the situation for first-home buyers overall will actually get better,” he said. “The DTI rule for most won’t matter but better low deposit access to funds will be positive.”
The adjustment in LVRs might be implemented before the end of the year, potentially as early as mid-year.
The OneRoof article can be found here. For additional commentary from Alexander, visit www.tonyalexander.nz
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