Lending could get harder

Pedersen says the RBNZ’s soft implementation of DTI restrictions won’t have too much impact due to high interest rates and the test rates banks already use mean many borrowers already struggle to qualify.

“As interest rates drop, the test rates will also track down and there will be a point where DTIs will become the handbrake.”

Under the new restrictions trading banks will be able to lend six times a borrower’s gross or pre-tax income on a residential owner-occupied property and seven times that of an investor.

However, they will be able to make 20% of new owner-occupier lending to  borrowers with a DTI ratio over 6 and 20% to those over 7. At the same time, LVRs will be eased to let banks make 20% of owner-occupier lending to  borrowers with an LVR over 80% and 5% of investor lending to borrowers with an LVR above 70%.

Pedersen says mortgage advisers have seen tightening with the Reserve Bank’s handling of LVR restrictions over almost 11 years – moving  investment LVRs to reduce demand and also reducing the amount of lending banks can do above a LVR of 80% to 10% as the pandemic property boom cooled.This resulted in first home buyers (FHBs) being locked out of the market and was only relaxed in June last year.

He doesn’t believe the DTI restriction of 7 for investors will stay at that figure but can’t say when it will change.

Leading into the pandemic, particularly the beginning of 2020, roughly 30% of lending was above a multiple of 7. So there is some fairness to the RBNZ’s argument that DTIs can prevent property bubbles, Pedersen says, although he doesn’t entirely agree with them.

Would they have worked in the pandemic housing boom?

In an earlier analysis of what the DTIs mean, ANZ has said nobody could say for certain what things would have looked like had the DTIs been in place, because it’s not known what the settings would have been, including the overlapping LVR limits.

When Covid hit in early 2020, LVR restrictions were suspended for a year, which ANZ chief economist Sharon Zollner says undoubtedly contributed to the housing market taking off.

She says DTI restrictions might well have also been suspended too had they existed, given the widespread expectation that double-digit falls in house prices were imminent and that the housing market needed all the support it could get.

Taking a look at how the lending over the housing boom compares to the new DTIs, Zollner says in the 2021 booming housing market, the proportion of new owner-occupier lending occurring at a DTI over 6x peaked more than 35%, and more than 40% for FHBs, compared to the new 20% limit. More than 40% of new lending to investors was at DTIs over 7 – more than double the new limit.

Zollner says while FHBs are not explicitly targeted by DTIs, they will be more affected simply because they typically require more borrowing than those upsizing or moving. The same is true for LVR restrictions to some extent as well, so the easing of LVR restrictions will make it slightly easier for some FHBs.

Whether LVR or DTI restrictions will have the most significant impact depends not only on their settings, but also on the macroeconomic context, she says.

“Although the RBNZ says the intent is to review macro prudential policy annually, LVR restrictions are likely to be tweaked more often than DTIs, because DTIs are “guardrails” reserved for booms.

Market not normal

Pedersen says advisers will be interested to see how banks use the extra allotment of higher LVR lending for investors.

“Is it going to be to whoever turns up first, people buying their first or second investment property, or investors with bigger portfolios. They will probably want to spread it and some of the bigger investors are going to find it quite hard to access more lending.”

While Pedersen has no facts to back this up, he says the market in the past four years has not been normal. But he says there’s no reason to introduce DTIs. “It’s a typical case of creating a solution for a problem that doesn't really exist.

“While there are some people in pain at the moment, it is not the RBNZ’s job to look after the average borrower; its job is to look after the financial system. And the financial system is fine.

“Considering the country is in a pretty harsh recession we have a surprisingly low level of mortgage arrears and a very low level of mortgagee sales. So why are we bringing a new regulation where we don't actually have much of a problem?”

DTIs low in first quarter

As TMM reported two weeks ago, DTI borrowing is at its lowest levels since 2017.

Figures for the March quarter reveal 31% of new mortgages were at a DTI of five. During February, 29.2% of new mortgages had a DTI of five – the lowest monthly share since data collection began in 2017.

In the first quarter, 22.6% of new mortgages to FHBs had a DTI of five. Compared to March last year when the share to FBHs with a DTI of 5 was at  28.4%. This is an annual drop of 5.8%.

The gross income of FBHs, the amount a bank is prepared to count in its servicing analysis and which can include the income of more than one person, was $151.300 for the quarter, up 1.1% from $149,700 in the same quarter last year.