The Reserve Bank issued its latest Financial Stability report today and one of its major focus points was the increase of lending at high debt-to-income (DTI) ratios.
Improved bank resilience to house price falls could be undermined if the increase in high DTI lending is sustained, the bank said.
“High-DTI loans are at a higher risk of default in the event of an economic downturn, so an increasing concentration of this lending is of concern.”
According to the report, around a third of new mortgage lending is currently conducted at a DTI ratio of over 6.
The bank said that if house prices continue to increase at the current rate, further pressure on housing affordability is likely to cause a higher share of lending at these stretched DTI ratios.
This means the introduction of DTI ratios could be warranted if housing market imbalances and lending standards continue to deteriorate – in order to mitigate the financial stability risks it poses.
For this reason, the Reserve Bank has formally asked Finance Minister Bill English to include a DTI tool in the memorandum of understanding that covers macro-prudential policy.
The bank remains in discussion with the Minister over potential issues relating to such a tool, but it also said it isn’t planning to make use of such a tool at this time
In the post-report media conference, Governor Graeme Wheeler would not be drawn on the level at which a DTI ratio could be set if it is introduced.
Economists across the board indicated they didn’t expect to see DTIs introduced in the near future – despite the Reserve Bank’s concerns.
ASB chief economist Nick Tuffley said the Reserve Bank has highlighted the housing market as a concern for a long time, but the report indicates there has been a shift in their focus on this front.
“It seems to have become more comfortable with the share of high LVR lending on the bank balance sheet, but has become concerned about the increases in debt relative to income.”
Despite this stated concern, ASB doesn’t expect the Reserve Bank to implement any such DTI restrictions for some time, he said.
“It will take some time for the DTI to be ready in a practical sense. It would probably take until the second half of next year to have it ready.
“They will probably want to have such a tool ready to go, subject to agreement with the minister – should they need it.
“But there is a question market over whether they will need to implement it when it is ready. It depends on their assessment of housing market risks at that point.”
Westpac senior economist Anne Boniface said that the Reserve Bank clearly still had to convince the minister a DTI tool was required.
But it was still moving forward with new data collection systems and discussions with banks and other stakeholders, she said.
“It’s likely that some of the urgency around implementing further macro prudential tightening has lessened as the OCR has reached the bottom of the easing cycle, and mortgage rates have started rising.
“Our own forecasts are for the pace of house price inflation to slow appreciably next year. Nevertheless, the Reserve Bank was at pains to point out the risks associated with an increasing share of lending at high debt-to-income ratios.”
ANZ senior economist Philip Borkin said the Reserve Bank isn’t claiming victory on the housing market and is worried about a growing share of high debt-to-income lending.
But while bank wants the ability to restrict this type of lending, there was no indication on the timing or likelihood of this, he said.
“The ball looks to be in the Government’s court.”