DTIs still on the Reserve Bank’s radar

Almost half of Auckland first home buyers have mortgages that are over five times their annual income – and that makes debt-to-income (DTI) ratios a hot topic again.

For the first time today, the Reserve Bank released new mortgage data showing the total borrower debt compared to borrower income for owner occupiers and first home buyers.

And it shows that DTI levels for borrowers around New Zealand remain high.

While the Reserve Bank doesn’t have a threshold for when a DTI is considered high, it keeps a particularly close watch on new mortgage lending with a DTI of over five.

Nearly a third (31%) of borrowers nationwide took out mortgages with a DTI of over five in June 2019, while 33% of first home buyer had mortgage debt of over five.

In Auckland, almost half of first home buyer debt was at a DTI over five but first home buyers most commonly borrow between four to five times the size of their income.

But the Reserve Bank’s financial system policy head, Toby Fiennes, says that while the ratios remain high, they have actually reduced over the last two years.

Back in June 2017, 37% of borrowers nationwide had mortgage debt of over five while 35% of first home buyers did.

For this reason, Fiennes says that even if the Reserve Bank had a DTI tool in its macro-prudential toolkit – as it has long wanted – they would be very unlikely to use it now.

“The levels of DTIs are high, but not extraordinarily high. We would have to have a pretty sound reason for introducing restrictions into the market.”

While the Reserve Bank was worried about the levels a few years ago, there are other factors at play now, with the lower interest rate environment more supportive of higher DTIs, he says.

“But we are on the record as saying we would like to have a DTI tool in the toolbox and if we did, and the levels started trending upwards again, we would consider using it.”

The second phase of the review into the Reserve Bank Act will be looking at its macro-prudential toolkit and DTIs are a part of that.

Consultation on phase two of the review is closing at the end of this week and there are likely to be decisions on key issues raised later this year, Fiennes adds.

Despite this drive towards a DTI tool, today’s release of the new DTI data, which the Reserve Bank has been collecting for several years, is not intended to push Government on the issue.

“It just happens that now is the time when we have enough confidence in the data and we feel we can put it out there.”

The DTI data is based on banks’ summary data of the debt and income of their new mortgage customers.

Reserve Bank head of data and statistics Steffi Schuster says it is intended to help the Reserve Bank better understand risks to financial stability from mortgage lending activity.

That’s because households with higher debt levels relative to their income may be more at risk of defaulting on mortgage repayments.

Also, borrowers with higher debt levels relative to their income are more likely to reduce spending in response to shocks, like a loss of income or higher interest rates.

Schuster says the DTI data can also help assess housing affordability for recent homebuyers and can be used with other information to gain richer insights into the housing market.

“For example, by comparing DTI figures with loan to valuation data, we can better understand risks from households with a combination of large loans relative to the value of their property, and large loans relative to their income.”

The Reserve Bank has now made monthly DTI data available from June 2017 onwards and, going forward, the data will be published quarterly.

Currently, the published DTI data does not include property investor data – although the Reserve Bank does collect it.

However, the Reserve Bank considers that DTIs are a less useful metric for property investor serviceability risks, particularly for major investors with large property portfolios. Further, the data quality of DTI data for investors is lower.

Read more:

LVR a “permanent tool”: RBNZ Governor 

Next phase of RBNZ review likely to assess DTIs 

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