Reserve bank Governor Graham Wheeler has been working for some time to reduce the risk that he sees in the New Zealand banking system, mainly centred on
house price inflation and low dairy product returns.
He has already attempted to restrain the demand for housing by introducing restrictions in investor loan-to-value ratios, thus limiting the amount that
the main trading banks can lend to those who are buying property.
Although these restrictions have resulted in some, mainly short term, reduction in demand the rate of increase in housing prices seems to be largely unrestrained.
Another weapon that is available to the Bank would be the introduction of a debt to income ratio for borrowers. A debt income ratio (often abbreviated
DTI) is the percentage of a consumer’s income that goes toward paying debts. As house prices rise so has the debt within households in relation to
their income – i.e. the debt-to-income ratios. A DTI limit could slow this trend and reduce the consequential financial instability.
Wheeler has already stated that “We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential
policy to include this instrument.”
Debt-to-income restrictions are already used in the United Kingdom, where most owner-occupier buyers cannot get a mortgage higher than 4.5 times their
annual earnings. However, it is not widely appreciated that these restrictions do not apply to buy-to-let investors (i.e. rental property investors)
under the current UK scheme.
There seems to be the intention that, if implemented in New Zealand, because most lending that is high debt-to-income is to investors, it would apply to
all lending and hence impact investors more than owner-occupiers.
Others disagree. Labour politicians don’t think these limits should be...
