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DTIs will have no significant impact on house prices immediately

The Reserve Bank doesn't expect its proposed DTI restrictions to have a significant impact on house prices in the short-term.

Tuesday, January 23rd 2024, 3:37PM 1 Comment

by Sally Lindsay

It has started consultation on setting the DTI policy to allow 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, while loosening the LVR ratios to allow to allow 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%.

These settings mean that banks cannot lend more than 20% percent of their lending to owner-occupiers with a DTI greater than 6; and 20% of investor lending to investors with a DTI greater than 7.

Allowing 20% of lending above the proposed DTI thresholds will help minimise potential efficiency costs by giving banks discretion to offer loans to high-DTI but otherwise creditworthy borrowers or for complex cases where a DTI cannot be easily determined.

The RBNZ is proposing to activate DTI restrictions from the middle of this year. This is the earliest date possible following this consultation, allowing time to consider the feedback, and to make final decisions, and for the banks to implement the new restrictions.

In its new consultation paper, the Reserve Bank says currently about 10% of first-home buyer lending is above a DTI of six. This is similar for owner-occupiers, without investment collateral, which will be included in the owner-occupier group along with first-home buyers for the purposes of the DTI restriction.

The RBNZ says the calibration won't initially be binding given existing market conditions where flows of high-DTI lending are low and expected to remain below the proposed speed limit in the near term.

The RBNZ’s view is that DTI restrictions can help to support sustainable house prices at the margins in the medium- to long-term by preventing house prices reaching unsustainably high levels in booms.

Its assessment is house prices "are within the range we estimate to be sustainable, with a lower risk of a house price correction than in recent years," Christian Hawkesby, RBNZ’s deputy governor says.

Modelling by the RBNZ suggests when interest rates are high financial stress begins to be felt at DTI ratios of six and seven. That's higher than in 2017 when the then- deputy governor Grant Spencer said a DTI ratio above five was "pretty high."

"We think if we get up over five that's pretty high. And it tends to be the area where potential stresses are going to emerge if there's a shock to interest rates or incomes," Spencer said in 2017.

However, in 2021 the Reserve Bank said a continued decline in interest rates meant almost 60% of new lending was taking place at a DTI above five, with about a third at DTIs above six.

"We do not consider it appropriate to calibrate DTI restrictions in a way that will capture a large share of lending at current levels. This could create a shock for the housing market and the potential for unintended adverse outcomes, e.g. the loss of customers," the Reserve Bank said in 2011. 

Potential of banks losing business

Meanwhile, the Reserve Bank says it's aware the more macro-prudential restrictions, such as DTIs and LVRs that are placed on banks, the greater the chance of  loss of customers to non-bank lenders.

"However, the risk is reduced by the easing of LVR restrictions and the non-binding level of the proposed DTI calibration and a large scale loss is unlikely during most of the credit cycle but may be more likely at the peak of the credit cycle when DTI restrictions become more binding,” the RBNZ says.

"Non-bank lenders are a small share of the residential mortgage lending market. We do not foresee DTI restrictions causing loss of customers from the big banks of the scale necessary to be a concern. However, we will monitor this and can move to address this if it occurs.

“Additionally, we will consider how macroprudential policy operate across all types of deposit takers as part of the upcoming DTA standards consultation," the bank says.

Introduction of the tool has also been opposed by banks, with bank lobby group the New Zealand Banking Association maintaining there is a real risk of adverse customer impact if DTIs are introduced.

Tags: RBNZ

« RBNZ gives details of new lending rulesNon-bank lenders a pimple on the backside of the market »

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Comments from our readers

On 23 January 2024 at 5:19 pm Amused said:
The following is a statement was made by National MP Andrew Bayly when he was National’s Shadow treasurer in opposition back in late 2021. I think this sums up best why the introduction of DTIs are a bad idea for New Zealand and borrowers in general. The RBNZ is admitting above that the introduction of DTIs will push some borrowers towards non-bank lenders forcing them to pay higher interest rates. Not sure how this will "enable economic wellbeing and prosperity for all New Zealanders" which is the stated purpose of the RBNZ.

03 November 2021

"News today that the Reserve Bank is still considering the introduction of debt-to-income (DTI) lending restrictions is extremely concerning, and shows that Grant Robertson can’t quite kick his addiction to counter-productive meddling in the housing market."

"DTI limits would impose artificial restrictions on the amount banks can lend to home buyers based on their income."

"To anyone with even the most rudimentary understanding of how banking works, the outcome of such a rule should be obvious – the first people banks will cut lending to are those on low incomes, making it even harder than it already is for first home buyers to get onto the property ladder."

"The Government is supposed to be making things easier for first home buyers, not harder."

"The Reserve Bank has been tying itself in knots trying to pretend these tools are necessary for financial stability. Appearing before the Finance and Expenditure Select Committee today, Reserve Bank officials did such a poor job of defending DTIs, they gave the impression they were begging for them to be ruled out."

"The reality is Grant Robertson has been leaning on the bank to help hide the Government’s failure on housing. Making it harder for first-home buyers to borrow in a desperate attempt to get skyrocketing house prices out of the headlines is both cynical and wrong."

"Grant Robertson needs to step in immediately and rule these changes out."

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Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.24 ▼6.75 6.65
ANZ 8.64 7.84 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.24 6.79 6.65
ASB Bank 8.64 7.24 ▼6.75 6.65
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.24 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.84 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.04 - -
Co-operative Bank - Owner Occ 8.40 7.24 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.74 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.69 6.45 6.19
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.75 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.39 7.25
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.25 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.25 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.75 7.35 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.84 7.45 7.25
SBS Bank Special - 7.24 6.85 6.65
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.74 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.04 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.24 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - - 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.89 7.35 7.25
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.29 6.75 6.65
Median 8.64 7.29 7.32 6.65

Last updated: 8 April 2024 9:21am

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