Although the Reserve Bank (RBNZ) hasn’t said it will introduce DTIs, it has indicated March next year is the date they will become a formal tool along with LVRs to restrict residential mortgage lending.
Davidson says they will be activated next year, but it won’t be to curb lending in this housing cycle but for subsequent cycles so house prices never rise 40% over two years as they did during the Covid pandemic.
Davidson says last week’s RBNZ release about the debt-to-income ratios didn’t say anything new. “There was no indication of the limit – whether it would be five, six or seven times income – exemptions or speed limits.
“It was to keep DTI restrictions in front of people to remind them the RBNZ was still looking at it and it could introduce it.”
It won’t be an issue for mortgage holders and new borrowers even if they are activated in March because risky lending has been reined in, he says. “The system is not that stretched.”
Davidson says it is likely if DTIs are put in place they will not bind in this cycle.
“Recently interest rates have risen so borrowers can’t service as much mortgage debt and house prices have come down so they haven’t had to borrow as much,” says Davidson.
“That is why DTIs activated next year might not bind because things have tightened up.”
He says introducing them is about keeping a lid on future property cycles, tying house prices to income and trying to limit house price growth to 10% or less year-on-year.
“While it will not restrict growth immediately it will in the long run. We won’t see outright house price falls but they won’t rise as quickly in future.”
The Reserve Bank has indicated it wants DTIs to curb the number of houses investors can own. Analysis by the Property Investors Federation suggests most of the country’s landlords are mum and dad investors who own or two properties at the most.
Davidson says DTIs will put a dampener on how much investors can borrow and the RBNZ believes that will restrict the number of properties anybody can own relative to their income.
It believes this will rule out mega landlords, even though there are not many of them.
Davidson says it’s anybody’s guess when the nitty gritty of DTIs – the borrowing level against income – is laid out by the RBNZ. “It could be in the bank’s six monthly Financial Stability Reports, usually released about May and November or it could sneakily announce it at any time, as it did with LVRs.”
Davidson believes the RBNZ wants to keep the concept as simple as possible, including what is defined as income and debt.