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Debt-to-income controls would likely have more of an impact on higher-income investors and owners, the Reserve Bank says.
The Reserve Bank says that controlling debt over home loan income would have a greater impact on higher-income investors and buyers and could benefit first-home buyers.
The central bank has asked commercial banks to prepare debt-to-income (DTI) checks on mortgage loans, as it aims to make the financial system more resilient to a downturn in the housing market.
“DTI restrictions on residential mortgage loans, when implemented, place limits on the amount of debt borrowers can take on relative to their income,” said Kate Le Quesne, the Reserve Bank’s director of prudential policy.
“This supports financial stability by limiting higher-risk mortgage lending, reducing the likelihood of a future housing-related financial crisis.”
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Lenders are expected to take a year to prepare for the new controls, so the changes would only take effect at least March next year.
As part of the agreement with Treasury Secretary Grant Robertson, the Reserve Bank must avoid negative impacts on first home buyers and consider financial inclusion when designing and implementing restrictions on debt service.
The bank said its analysis showed that the planned debt-to-income controls are likely to have more of an impact on higher-income investors and owners who borrow at higher debt-to-income ratios.
“They would be least binding on first home buyers and lower-income owners, who generally borrow at lower debt-to-income ratios,” the bank said in a regulatory impact assessment published Monday.
The bank noted that Kainga Ora loans for first homeavailable only to first-time homebuyers whose income falls below a certain threshold would be exempt from the debt-to-income control.
Breakfast
New Zealand’s economy is “a housing market of loose parts,” economic commentator Bernard Hickey told Anna Burns-Francis in Breakfast.
In its explanation of the proposed new controls, the New Zealand Property Investors’ Federation, which represents the interests of more than 7,000 property investors, argued that they should not be applied to loans to investors.
The Federation said introducing controls on debt income, including investor lending, would have a further impact on the already declining number of private rental properties available to tenants.
However, the Reserve Bank said the impact on rental housing supply would be minimal.
It noted that new home construction and redevelopment of existing properties would be exempt, and that banks could take some loans above the threshold.
If debt-income controls prevented investors from purchasing existing homes, this should lead to a compensatory increase in the availability of existing homes for first home buyers who were currently renting and, as a result, to a reduction in demand for rental housing of those who became owner-occupiers, the bank said.
If the restrictions led to a reduction in average house prices, that would reduce the amount of debt needed to buy rental properties, it noted.
The bank said the introduction of debt-to-income controls could allow it to relax loan-to-value restrictions on residential mortgages.
“This would be beneficial buyers of first homesas saving for a down payment on a first home can be challenging, especially for those on lower incomes,” it said.
“The size of the down payment required to buy a first home (and the time it takes to save for that down payment) has increased significantly over the past 20 years along with the rise in house prices. In contrast, the debt service burden on new borrowers as a percentage of income has not moved higher in the past 20 years, although it fluctuates significantly at different stages of the housing cycle.
Introducing controls on the debt-to-income ratio while easing restrictions on the loan-to-value ratio could have a positive impact on first-home buyers’ ability to enter the housing market, it noted. on.