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Debt-to-income controls were likely to have more impact on investors and higher income owner occupiers, the Reserve Bank says.
The Reserve Bank says debt-to-income controls on home lending would more heavily impact investors and higher income buyers and may benefit first-home buyers.
The central bank has asked trading banks to prepare for debt-to-income (DTI) controls on mortgage lending as it seeks to strengthen the resilience of the financial system to a housing market downturn.
“DTI restrictions on residential mortgage lending, when implemented, set limits on the amount of debt borrowers can take on relative to their income,” said Reserve Bank director of prudential policy Kate Le Quesne.
“This supports financial stability by limiting higher risk mortgage lending, thus reducing the likelihood of a future housing related financial crisis.”
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It’s expected to take lenders a year to prepare for the new controls, so the changes would not be enforced until at least March next year.
As part of its agreement with Finance Minister Grant Robertson, the Reserve Bank has to avoid negative impacts on first-home buyers and consider financial inclusion when designing and implementing debt servicing restrictions.
The bank said its analysis showed its planned debt-to-income controls were likely to have more impact on investors and higher income owner occupiers who borrow at higher debt-to-income ratios.
“They would bind least on first-home buyers and lower income owner occupiers, who generally borrow at lower debt-to-income ratios,” the bank said in a regulatory impact assessment published on Monday.
The bank noted that Kainga Ora first-home loans, which are only available to first-home buyers whose income falls below a certain threshold, would be exempted from the debt-to-income controls.
Breakfast
New Zealand’s economy is “a housing market with bits tacked on,” economics commentator Bernard Hickey told Anna Burns-Francis on Breakfast.
In its submission on the proposed new controls, the New Zealand Property Investors’ Federation, which advocates for the interests of more than 7000 property investors, argued that they should not be applied to investor loans.
The Federation said introducing debt-to-income controls which included investor loans would further impact on the already declining number of private rental properties available for tenants.
However the Reserve Bank said it believed any impact on the supply of rental property would be minimal.
It noted new housing construction and remediation of existing properties would be exempted, and banks would be able to undertake some lending above the threshold.
If investors were prevented from buying existing properties due to debt-to-income controls, that should lead to an offsetting increase in the availability of existing properties to first-home buyers who were currently renting, and consequently a reduction in demand for rental properties from those who became owner occupiers, the bank said.
Should the restrictions lead to a reduction in average house prices, that would reduce the amount of debt required to purchase rental property, it noted.
The bank said introducing debt-to-income controls may enable it to loosen loan-to-value ratio restrictions on residential mortgage lending.
“This would benefit first-home buyers, since saving for a deposit on a first home can be challenging particularly for those on lower incomes,” it said.
“The size of the deposit needed to purchase a first home (and the length of time required to save for that deposit) has increased significantly over the past 20 years alongside the rise in house prices. By contrast, the burden of debt servicing for new borrowers as a proportion of income has not trended higher over the past 20 years, although it fluctuates significantly at different stages of the housing cycle.”
Introducing debt-to-income controls while at the same time loosening loan-to-value ratio restrictions could have a positive impact on the ability of first-home buyers to enter the housing market, it noted.
