New Debt to Income Ratio to slow NZ's property market?

[Sanya]

The Labour Government of New Zealand is in a pickle over rising house prices.

Its said no (this term at least) to a CGT or other new taxes.

Current suggestions of extending bright line tests and another review of ringfencing loses will do nothing.


Mr Orr of RBNZ has come up with another plan which unlike extending the bright line test – may have a meaningful influence on house prices.

See :

https://www.rnz.co.nz/news/business/431487/adrian-orr-says-reserve-bank-wants-to-introduce-debt-to-income-ratios-to-nz

The plan? Introduce debt to income ratios and require all banks and financial institutions to comply.

We don’t have any details yet but it’s possible such a tool may simply cap debt. For example RBNZ may say total debt can be no more than 5 times total income.

So a landlord from Patea who earns a salary income (after tax) of $60k and makes an additional $20k per annum (after expenses and tax) from his rental properties can have a total debt of no more than $400k.**

Total debt embraces not only house loans (private and investment) but any hire purchase, personal loans, credit card debt etc.


Do you think DTI will be introduced?

Will it slow value growth in NZ's hot property market?

Is this a magic tool for Labour?





** By way of comparison an annual net income of $80k could typically leverage $700k of debt today.

[Rosco]

The banks are already doing this to some degree with serviceability tests.

It all depends on what DTI ratio was set, and it could do nothing, or have a huge effect.

In general, I think it is a good idea, the same as banks trying to make sure customers have good serviceability.


Alternative - use none bank lenders, which are unlikely to be effected.

[Sanya]

The banks are already doing this to some degree with serviceability tests.
It all depends on what DTI ratio was set, and it could do nothing, or have a huge effect.
In general, I think it is a good idea, the same as banks trying to make sure customers have good serviceability.
Alternative - use none bank lenders, which are unlikely to be effected.

Agreed Ross, though i'd suggest that with record low interest rates - servicing a loan has never been easier and this in turn has driven (in some cases) excessive borrowing.

RBNZ has been tracking DTI for some time and by some accounts become concerned at anything greater than 5x.

Comparatively the United Kingdom limits debt to income to 4.5 times for most borrowing.

I see some merit but its a blunt tool and side affects could be significant particularly for those trying to enter the market.

[Jeffa]

My uneducated pov.

Positives:

-House prices stop rising
-Allows wages to catch up to house prices.

Negatives:

-Small business may not be able to leverage against property.
-Less growth in small business
-Less growth in economy
-Less jobs.
-Migration to the regions for first time home buyers from Auckland and Wellington were dti affect ability to buy
-Auckland industrial powerhouse would flatten or reverse.
-Exodus to Australia .
-Population decrease.
-Property investors exit market to Australia or Shares.
-Housing market collapse.
-NZ population and gdp reverses to the same as 90s
-At least 2 decades before prices recover.
-Cycle restarts.

Probably over the top scenario but there are wiser one's in charge who already know the risk isn't worth the reward trying to stop or reverse house prices.

The easier option would be raise interest rates but you would most likely get the same scenario because we are still negative gdp and low inflation.

I'd say the government may push the brighline test to 7 years and something else minor to act like there doing something.

I personally believe if the Key government hadn't have approved lvrs and the central bank let the cycle run its course without interfering we would not be having this conversation now. Infact you would most likely have more first time home ownership through very low deposits.

Because although the rest of the developed econmies are seeing house price inflation due to low interest rates were the only one seeing 20% hpi.
So what was the point adding these restrictions?

For ever action taken there is a reaction, obviously those in charge don't want to admit this because they have to act like there working for us.

[Sanya]

Uneducated point of view?

I don't think so Jeffa.

I've been wondering about the possible side effects of DTI and I think you've identified some. I suspect the impact would largely be determined by what ratio was finally decided and how rigidly it was enforced. The same DTI that can act as a safeguard against irresponsible lending and potentially contain spiralling house values can slow economic growth and increase dissatisfaction with Government...

[McDuck]

There are several ways to apply a DTI.

I spent the time, did the research, wrote the formulae, and tried some scenarios.
Then considered all the possible short and long term consequences.
In a relatively large arena.
(Allowing for leakage thorough human nature and cunning non compliance etc).

With this one, the devil is in the details.
It's how the DTI is applied.
You can't make any decent predictions about the outcome until you see the exact type of DTI they intend to apply.

There are several interdependent feedback loops that really can throw the system into collapse rather quickly,
depending on the meaning of debt and the meaning of income.
________________

As for the political backlash,
The Govt got a free pass on their housing failures this time,
mostly because they did so well on the Covid and the racial issues.
However, if they can't support the present generation of young people by quickly delivering on housing, it's all over for them.
_________________

As for the role of debt in growing an economy, and society,
yes it has a place,
but it's absolute rubbish to let it take it's present destructive role.

_________________

My only other observation is;
It's not a Property Market.
It's a collection of smaller independent markets each using a house and dirt for different purposes.
Many for the wrong purpose.
Its possible to cull one subgroup without causing too many problems overall.

[hawkeye]

It might push rents up. If people have properties that are cashflow neutral or negative they won’t be able to buy anything other than what they can afford on their salaries.
Tax on unrealised capital would stop things too in a similar way.

[donna]

Labour is about shrinking the gap between rich and poor - a DTI doesn’t help that cause. The RBNZ have wanted it for years and even National pushed back on it.

As you say DTI hurts those on fixed incomes. Investors can grow their income via rent rises hurting those on fixed incomes even more.

cheers
Donna

[McDuck]

Labour is about shrinking the gap between rich and poor - a DTI doesn’t help that cause. The RBNZ have wanted it for years and even National pushed back on it.

As you say DTI hurts those on fixed incomes. Investors can grow their income via rent rises hurting those on fixed incomes even more.

cheers
Donna

That's a really good point Donna.
I think you solved it.

If Passive income was not allowed to be considered as income, ..
that would solve the productivity side of the equation.

Insures could charge sky high premiums on passive income.
And banks could demand all sources of income were insured...for integrity.

Funny to think that insurers might be a useful tool for control.