Financial Stability Report: DTI and high-risk lending a concern

The Reserve Bank's latest Financial Stability Report highlights rising debt-to-income ratios and high LVR lending as the main risks in the New Zealand mortgage market. 

The biannual report, released this morning, reveals banks are "more willing to grant higher DTI loans to comparable borrowers than in 2018", with the average DTI for owner-occupiers rising to 5.3, from 4.8. 

But the central bank pointed to lower debt servicing costs, due to low interest rates, giving borrowers more capacity to absorb declines in income. 

The FSR also noted the risk of high LVR lending after it scrapped LVR restrictions at the height of the pandemic in March. 

While the central bank has moved to reimpose LVR restrictions from March next year, it noted "increase in the riskier categories of mortgage lending in recent months".

But banks have kept high LVR lending to a "low proportion", the report said, which would "reduce potential losses", "in the event of a severe house price correction".

The central bank warned banks to maintain strict standards, and that "a material easing in standards for new lending could see risks increase over time".

They have done this by maintaining tight servicing tests, according to the report. Servicing test rates averaged 6.4% in September, down from 7% the year before.

The report also pointed to skyrocketing house prices, with the nationwide price to income ratio rising to 7.7 in October, from 6.8 a year earlier. 

The central bank said house price inflation "increases the risk of a sharp correction in the medium term, if the current demand and supply imbalances quickly unwind". 

In its report, the RBNZ doubled down on its call to reimpose LVR restrictions next year.

"The Reserve Bank intends to re-impose LVR restrictions at their previous settings from March 2021, to guard against continued growth in high-risk lending so that banks remain resilient to a potential future housing market downturn," it said.

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