In a consultation that is underway on introducing debt-to-income (DTI) restrictions in the middle of this year, the RBNZ says it is aware the more macro-prudential restrictions, such as DTIs and LVRs that are placed on banks, the greater the chance of loss of customers to non-bank lenders.
“This just won’t happen, Bolton says. “The non-bank sector struggles for funding at the best of times. It's not that big. It's tiny, it's a pimple on the backside of an elephant. It's small and insignificant.”
Introduction of the tool has been opposed by the major bank banks, with bank lobby group the New Zealand Banking Association maintaining there is a real risk of adverse customer impact if DTIs are introduced.
Bolton says the banking association has been over the top about this. “The major banks have such a huge competitive advantage in terms of their cost of funding. “Basically they get low cost deposit funds which they can then lend out cheaply and the non-bank sector can't compete with that. So, there's going to be no big shift to the non-bank sector at all. And bear in mind, those DTI’s are quite high. I think owner occupied borrowers with DTIs over six probably can't afford it anyway.
The RBNZ is proposing a DTI policy that allows banks to lend 20% of their residential loans to owner-occupiers with a DTI greater than 6 and 20% of their residential loans to investors with a DTI greater than 7, while loosening the LVR ratios to allow 20% of owner-occupier lending to borrowers with an LVR greater than 80% and 5% of investor lending to borrowers with an LVR greater than 70%.
These settings mean that banks cannot lend more than 20% percent of their lending to owner-occupiers with a DTI greater than 6; and 20% of investor lending to investors with a DTI greater than 7.
Not a believer at first
When he first came across DTIs, Bolton detested them believing they were just another blunt instrument to capture the nuances of lending. He believed everybody would be far better off relying on bank servicing calculators as a fundamental tool to determine who could get money and who couldn’t.
He says the RBNZ’s now proposed settings are not all that different from bank servicing calculations and the vast majority of borrowers will sit inside the DTI levels.
“There is some risk with investors”, he says. “It is conceivable an investor with a large property portfolio is going to quite easily be at a DTI of 7. “But the Reserve bank is asking for feedback and those sort of nuances will get picked up.
As a broad rule of thumb, the DTIs actually look okay, Bolton says. He now quite like DTIs because they are consistent through an interest rate cycle. “When interest rates are low, it slows down the amount that banks can lend. When interest rates are high, it might make it a bit easier for banks to lend.
“They will work if it means bank servicing calculators aren't overly conservative at the top of an interest rate cycle like they have been lately. At the moment, banks are testing clients ability to borrow on servicing rates of 8.5- 9%, which is ridiculous when actual interest rates are below 7%.”
“Where a DTI will really work is when interest rates are at the bottom if a cycle as it will prevent lending more than bank’s servicing calculators allow. Banks probably lent too much money and were too generous when interest rates were really low a few years ago. That hurt people as interest rates rose. If DTIs can take a little bit of heat out at the bottom of the market it makes it a bit easier at the top of the market, particularly when with speed limits and loosened LVRs.”
Bolton says a DTI will work better than LVRs because it’s looking at affordability instead of how much equity is in a property through an LVR.
CoreLogic chief property economist Kelvin Davidson says there aren’t too many surprises in the RBNZ’s DTI proposal of up to 20% of lending to owner-occupiers at a DTI of 6 and up to 20% of lending to investors at DTI of 7.
“Only about 10% of owner-occupiers are above that mark, and less than 10% of investors – with high mortgage rates currently doing the work. In other words, DTIs may not bind straightaway, and they’re more about the ‘next cycle’, when mortgage rates do eventually fall again. “
New-builds will be exempt from the DTI system, while investors will be able to include 100% of the rental income on their application (previously it was less than 100%).
Borrowers would need to pass both the DTI and loosened LVR tests, but it’s not retrospective – only when somebody applies for a new loan (or top up) will the bank assess the LVR and DTI limits.
Davidson says the DTI proposed could ultimately be a net loosening of credit conditions – if DTIs won’t bind anyway, an easing in LVRs will tend to add a bit of extra demand to the market.
House price still expected to increase
Meanwhile Westpac chief economist Kelly Eckhold says the RBNZ’s proposed DTI settings have not changed the bank’s forecast for house prices to rise by about 8% this year and a further 6% this year, while growth in nominal wages will be about 5% this year and 3% next year.
He says the DTI settings are not restrictive but will automatically become more so during a housing boom when mortgage interest rates typically fall sharply, allowing borrowers to service higher debt levels.
“Right now, the RBNZ has consistently indicated it does not see house prices as unsustainable – hence this move should not be interpreted as an indication of dissatisfaction with housing market trends.”
Eckhold says based on Westpac’s forecasts, DTIs should move higher in coming years when lower interest rates and changes in investor tax deductibility could further fuel increased DTI lending.
At the same time as implementing DTI restrictions, the RBNZ is proposing to reduce LVR settings further. “This is another modest adjustment that we think is consistent with the RBNZ taking the opportunity to move LVR settings towards a more neutral level,” he says. Reducing LVR restrictions now when house prices are at sustainable levels allows room for tightening if that situation were to change in future years,” he says.