Reserve Bank asks for DTIs

Reserve Bank governor Adrian Orr has asked Finance Minister Grant Robertson to add debt-to-income ratios to its macro-prudential toolkit, as it responds to government pressure on house prices.

Adrian Orr

The RBNZ head has published a response to Robertson's public letter last month, in which Robertson raised fears over house price inflation.

Orr has rejected Robertson's request for the central bank to include house price inflation within its remit.

"Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency, by reducing public understanding of the objective of monetary policy," he said.

But the RBNZ governor has suggested a range of new measures to safeguard financial stability, including DTIs.

DTIs are not currently part of the Reserve Bank's toolkit, but the RBNZ requested "that the Government gives consideration to adding restrictions on debt serviceability (that would include DTI limits) to the permitted tools in 2021".

Orr said DTIs could work in tandem with LVR restrictions, due to be reinstated next March.

But he warned they may not be effective, and could disproportionately hit lower income buyers.

"It is ambiguous as to whether increased LVR restrictions or the imposition of DTI restrictions and higher capital requirements would assist the Government’s goal of housing New Zealanders, and reducing inequality and poverty," he said.

“Higher prudential requirements generally imply higher deposit requirements, lower credit ceilings, and higher interest costs for the mortgage borrower. All of these factors disadvantage lower income and lower wealth households."

While ASB has introduced DTI ratios in recent months, advisers are unconvinced of their merits, and say they may be unworkable in expensive locations such as Auckland.

Mortgage People's Martin Thomas said DTIs would be difficult to implement in NZ's biggest city.

He said they were "probably impractical in Auckland with median house prices over $1,000,000. If you’re borrowing $800,000 it assumes an income of $133,000 – that will cut most FHBs out of the market, if the banks cap DTI at six times."

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