Uncertainty over DTI effects

Ireland and the UK have DTI caps of between three-and-a-half and four-and-a-half times income and in the UK banks can only advance up to 15% of the number of new mortgages at a DTI greater than 4.5.

Because New Zealand did not have DTIs during 2020 and 2021 when the RBNZ temporarily suspended LVR rules because of fears the pandemic would mean a plummeting housing market and wrecked economy, house prices actually rose 45% compared to increases of about 25-30% in Australia, Canada, the UK, US, Germany, Sweden and the Netherlands, Australian bank services firm Macquarie found.

It led to NZ’s housing market being dubbed the “canary in the coal mine” by overseas economists.

Kelvin Davidson says a case can definitely be made for DTIs here but it is difficult to know if they have worked in other countries.

In the UK, DTIs were imposed in June 2014. House prices rose 6% in 2015 and values in most of London's property market rose by 8.2% in the year to May 2016. While experts argued that without the DTI these price rises would have been greater, no-one could prove it.

Davidson expects the RBNZ to set the DTI to seven times a borrower’s income, which while high by international standards, reflects the high cost of NZ housing. “If it is set too low it is going to completely scuttle the market.”

A recent Bank of International Settlements (BIS) study on NZ loan-to-value (LVR) ratios by two Reserve Bank researchers indicates debt servicing restrictions, and specifically DTI ratios, are most effective in supporting financial stability and sustainable house prices, with les  impact on first-time buyers than investors.

As DTI restrictions link credit availability to income, they are seen to be more effective in constraining debt levels throughout the housing cycle compared with other macroprudential tools.

However, Gilligan Rowe accountant Matthew Gilligan says the RBNZ's argument for the necessity of DTI seems to be inaccurate. “Some may even say outright distorted.”

Tailrisk Economics also published a paper saying, "…it's a clumsy tool which will have many perverse effects".

Gilligan says the RBNZ’s DTI methodology doesn’t  adequately assess borrowers' service capabilities. “A borrower's service ability can and does change over time. Hence the original DTI measure is unlikely to be a good indicator of the person's capability to handle a debt servicing event in the future.”

Household wealth

NZ’s median house price is about nine times the median household disposable income, having increased over the past 20 years as long-term interest rates have trended lower globally. House price fluctuations have been made worse by constrained supply because of surging population growth boosted by net immigration and not enough houses being built.

Davidson says one thing to do about housing affordability is to use debt to income ratios.

“While there will still be upswings and downswings in house prices and a bit of volatility, over the long run DTIs are going to tie house prices more closely to income growth. Historically that's run at 3%, which is lower than house prices, which tend to run at 6% or 7% growth a year. That’s definitely going to help with housing affordability,” he says.

DTIs also limit the number of houses somebody can own. Davidson says in the short run if a borrower has reached their debt limit and their income has not increased sufficiently, they will not be able to buy more property, whereas under the LVR system they can keep buying as property prices rise and create a deposit for another house. 

Investors tend to carry higher levels of debt than owner-occupiers do, so DTIs will dent their ability to take on more, and curb their enthusiasm about doing so, he says.

Speaking to the NZ Herald in December, RBNZ deputy governor Christian Hawkesby wouldn’t say when DTI restrictions could be implemented but that RBNZ isn’t keen to adjust DTI restrictions as frequently as it adjusts LVR restrictions, which limit bank lending to borrowers with relatively small deposits.

Big mortgage lending subdued

However, when interest rates were low and the property market was red hot in January 2021, 27% of banks’ new commitments went to borrowers with DTI ratios above seven.

Those figures soared  in September 2021 when other owner-occupiers with investment property collateral and investors with a DTI of over seven each accounted for around 35%; the share of new mortgage lending to investors with a DTI of over nine increased to 10.2%; other owner occupiers with investment collateral rose from a low of 4.8% to 9%; and, the average share of Auckland loans to Investors with a DTI over seven climbed from a low of 28% in September 2019 to 47% two years later.

DTI figures are compiled monthly, but released quarterly and since the peak house prices on average have dropped by about 15% from their late 2021 peaks, and mortgage rates have increased from in some cases below 3% to more than 7%. As a result, less money has been borrowed. 

The Reserve Bank’s quarterly DTI figures at September last year showed $1.6 billion of new mortgages had a DTI of five, the lowest share since data began in 2017. For first home buyers 29.7% of new mortgages had a DTI of five, falling from 41.5% in September 2022.

The share of new mortgages with a DTI of seven was 5.2%, which is the lowest since data collection began. This compares with the peak of 26.5% in January 2021.

DTI restrictions could take effect from about the middle of this year, if implemented.