DTIs not on the cards yet - RBNZ

The Reserve Bank might want debt-to-income ratios (DTIs) as part of its arsenal but it doesn’t intend to introduce them into the regulatory mix at this stage.

Thursday, November 10th 2016, 1:45PM 1 Comment

by Miriam Bell

Speculation about whether or not the Reserve Bank will enact controversial DTIs for residential mortgage borrowers in a bid to quell housing market activity has been rife for months.

When it emerged recently that the Reserve Bank has formally asked the government to allow it to add DTIs to its existing suite of macro-prudential tools, it appeared that DTIs were on the horizon.

But, at the OCR press conference today, Reserve Bank governor Graeme Wheeler provided further clarification of the Bank’s thinking around the introduction of DTIs.

Wheeler said they have requested approval from Finance Minister Bill English to include DTIs as an instrument in the memorandum of understanding around macro-prudential policy. There have been several discussions with the minister about DTIs and there will be another one in a couple of weeks.

The minister was interested in such questions as how the DTIs would complement the LVRs, what unintended consequences there might be, and who would be affected by the DTIs, he said.

“But we want to make it clear that if we had them as an instrument, it is not our intention to apply them in this situation.”

The housing market was starting to slow down to a degree due to reasons such as the impact of the LVRs and the tightening of banks’ credit criteria, Wheeler said.

It was unclear whether the moderation of house price inflation would continue – given the continuing imbalance between supply and demand.

“We will be watching the data and keeping a close eye on the situation… But that is where we are with DTIs and how we see the housing market at the moment.”

Asked if the Reserve Bank would prefer to further tighten LVRs before enacting DTIs should the housing market take off again, Wheeler did not commit either way.

He said both tools were helpful in terms of reducing risk to the banking sector.

“DTIs reduce the risk of force sales because borrowers have greater capacity to service their debt, while LVRS reduce the risk to banks if there are forced sales. They complement each other well.”

However, the Reserve Bank thinks they got the 40% LVR requirement for investors about right, he said.

“After looking closely at the data, we felt comfortable moving the way we did with the investor LVRs because of the greater risk of default.

“But, if at any point, we had to raise LVRs we would have to look at how that would match with the integrity of the underlying default data.”

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Comments from our readers

On 15 December 2016 at 11:44 pm Peter L said:
What about the effect that DTIs would have on those people who wish to start or expand a business.
If you want a business loan from a bank, the second question the bank will ask is "What real estate will you be putting up as security for the loan?"
(No real estate, no loan).

Given that almost all businesses return very little income for the first few years, no entrepreneur will be able to get bank finance if the DTI restrictions are imposed.

Thus this action will cripple small business in NZ.

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