Debt to income ratio restrictions – coming soon

How they could affect the housing market.

The Reserve Bank (RBNZ) is proposing to introduce debt-to-income (DTI) ratio restrictions on bank home lending.

DTIs limit the amount you can borrow according to your income. For example, a DTI of six means you can borrow six times your income. Earn $100,000; borrow $600,000.

The Reserve Bank’s proposal allows banks to:

  • Lend 20% of their residential loans to owner-occupiers with a DTI greater than six; and
  • 20% of their residential loans to investors with a DTI greater than seven

RBNZ is also proposing to loosen loan-to-value ratio (LVR) restrictions on low equity mortgage lending, allowing:

  • 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%

What’s the point?

The Reserve Bank is aiming to reduce risky lending when the housing market runs hot. By constraining lending, DTIs reduce the boom-and-bust nature of the housing market: borrowers are prevented from taking on large loans relative to their income, helping constrain house price increases to more reasonable levels. DTIs should also help reduce the number of mortgage defaults and mortgagee sales during periods of high interest rates and deflated house prices.

The approach has some flexibility built in, where restrictions are binding during booms but minimally binding during other times.

“Activating DTI restrictions at this time, rather than waiting until we see a build-up in risky lending, means that they are more likely to be in place when they are needed given that it takes time to activate DTI restrictions,” The Reserve Bank said. “We expect, following activation, DTI restrictions to be binding when financial stability risks are elevated, but minimally binding at other times.”

Likely impact of DTIs on the NZ housing market

Given the state of the property market currently, DTIs are unlikely to have much impact. Most lending right now is on a one-year term and house prices are well down on their recent peak. Moreover, Reserve Bank data shows that banks are lending at levels under DTI ratios.

Regardless, The Reserve Bank isn’t expecting big things. “Estimating the exact impact of DTI restrictions on house prices is difficult, particularly given that DTI restrictions have not yet been used in New Zealand. Our previous experience with LVR restrictions shows that they have a relatively small impact on house price growth. As such, we expect that the proposed loosening of LVR restrictions will only impact house prices at the margin,” the Reserve Bank said.

DTIs will do their work during the next property boom, ruling out the kind of big loans needed to support crazy offers that add fuel to property prices. Consider the most recent property boom in late 2021, when higher DTI borrowing was at its peak. At the time, around 32% of bank lending to owner occupiers had a DTI of 6 or higher, and around 43% of investors had a DTI of 7 or higher. DTIs would have made a considerable impact.

2024 is a big year for legislative changes in the property sector – for investors and tenants. Talk to Goodwins to get up to speed with changes that could affect you. Call 0800 GOODWINS.