In February, the Government asked the RBNZ to conduct analysis on the merits of DTIs amid soaring house prices.
The Reserve Bank has released its advice to the minister today.
According to the central bank, DTIs "are likely to be the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability".
The Reserve Bank has concluded that DTIs "would impact investors most powerfully while having limited impact on first home buyers".
It also concluded that a DTI limit would be a complementary tool to loan-to-value restrictions, "as they address different dimensions of housing-related risk; DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default".
In response to the RBNZ guidance, the Finance Minister has added debt serviceability tools to the Reserve Bank's policy toolkit, on the condition that implementation is designed to avoid an impact on first home buyers.
The RBNZ will work with Treasury to update its memorandum of understanding.
Reserve Bank governor Adrian Orr said "Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels.
"We believe that a 'sustainable house price' is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates."
The Reserve Bank will discuss the feasibility of DTIs in a consultation over the coming months, along with a regulatory impact assessment.
The step closer to DTIs is the latest blow to investors following the Government's radical housing reforms.
Landlords have been hit with an extension to the bright-line test, and the planned removal of deductibility of interest payments, as ministers look to crack down on investor activity.
