DTIs will be hard on start-ups

Start-ups will be hit hard if the RBNZ introduces debt-to-income (DTI) restrictions later this year.

Many small to medium enterprise (SME) owners borrow against their home for their business.

Squirrel Mortgages founder John Bolton says it has been a problem for a long time. “It has been a problem with loan-to-value (LVR) restrictions and it will be a problem with DTIs.

“It is even a problem with how banks approach residential lending generally. The SME market is a neglected segment that is not well catered for by the banks. And the RBNZ doesn’t really think about that when it is gearing up for new macro-prudential policies. It is a market both the banks and RBNZ have to be careful about.”

Bolton says the real problem with DTIs will be start-up businesses that might be losing money initially. “How is a DTI calculated for the start-up owner who has a home but a business that is forecast to make money but it is not making money immediately?

Banks struggle with that anyway and they are going to struggle a whole lot more once a DTI framework is in place.”

Boom and bust

When asking last month for feedback on the proposed DTI restriction levels, RBNZ deputy governor Christian Hawkesby said the financial stability risks of boom and bust credit cycles were significant, so it was important to have appropriate policies in place to manage them.

"DTI restrictions, which set limits on the amount of debt borrowers can take on relative to their income, will complement other tools we use to support financial stability, including LVR restrictions on residential mortgage lending," Hawkesby said.

"While the LVR tool is aimed at improving the resilience of the financial system by reducing potential losses when households default on their mortgage, the DTI tool is aimed at reducing the probability of a systemic wave of households defaulting. We believe introducing DTI restrictions will reduce financial stability risks.”

DTIs not needed

Gilligan Rowe & Associates Property and business accountant Matthew Gilligan says DTIs will make it harder than it already is for people to get started as the banks will have no discretion to lend beyond the limits set by the RBNZ. “The main banks have proven to be responsible in their lending practices; why do we need to shut down their discretion that helps younger people get going?”

He says in the long run, capital growth will be moderated by the link between income and the ability to borrow. Incomes will lag capital growth during boom times, so DTIs will inhibit bubbles from forming. “House price growth will become linked to long-term income growth, which is sobering for investors."

Does the country need DTIs as well as LVR restrictions? Not according to Gilligan.

He says LVRs are a back door DTI because they restrict debt and therefore servicing requirements.

In his opinion, the RBNZ should leave this to the prudential lending code, which is working well. “Don’t interfere with things that are not broken – that is nanny state nonsense. Leave it to the adults running the banks; they protect shareholder funds, and history shows the first tier banks do a good job, at least over the past 30 years). New Zealand banking is well-managed and stable – our bank defaults are at globally envious rates, so we don’t need DTIs as well as LVRs.

“In saying that, at least DTIs will stop the Reserve Bank from creating housing bubbles again. It is ironic that the only real house price bubble and correction of more than 20% was caused by rules set by RBNZ governor, Adrian Orr. “

A housing bubble is defined as a market with a correction of more than 20% following a boom. Between 2020 and 2022 first home buyers and new investors were lured into the property market at historically low interest rates and high LVRs, and then had the rug pulled out from under them when interest rates rose more than threefold – from 2.65% to now about 8%.

“Yet now the same Reserve Bank governor who caused this volatility and harm to low equity /low income investors is telling banks how to run their books, to stop housing bubbles forming and stabilise banking.”

Gilligan says the problem, if there is one, is with Orr over-driving the market and causing volatility. Not the rule book that banks play with. He says Orr should leave the market alone and not bring DTIs in.

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