NZ First Impressions – RBNZ announces consultation on new Debt-to-Income restrictions
The RBNZ has proposed the Debt-to-Income (DTI) settings to be applied to new lending. The RBNZ also proposes a further reduction in Loan-to-Value restrictions if DTI restrictions are implemented.
- The RBNZ has proposed the Debt-to-income (DTI) settings to be applied to new lending.
- The RBNZ propose allowing banks to lend up to 20% of residential loans to owner occupiers with the DTI> 6 and to investors with a DTI > 7 respectively.
- The consultation process closes on 12 March.
- The proposed DTI settings are not restrictive given recent lending trends and should have little housing market impact.
- This would change if house prices were to increase significantly compared to household incomes in coming years, or if interest rates were to fall sharply.
- The RBNZ also proposes a further modest reduction in Loan-to-Value Restrictions (LVR) if DTI restrictions are implemented. We see this as a continuation of the reduction in 2023 designed to bring LVR settings closer to neutral levels.
- We don’t see any monetary policy implications from this proposal.
The RBNZ wants to add another iron to the bag.
As previously signalled, the RBNZ is planning to move forward with implementing DTI lending restrictions. The aim is to provide an additional tool to manage potential financial stability risks associated with excessive lending to highly leveraged households and investors.
The proposal is to allow banks to lend:
- 20% of their residential loans to owner-occupiers with a DTI greater than 6, and
- 20% of their residential loans to investors with a DTI greater than 7.
In addition, the RBNZ is proposing to ease the LVR settings at the same time as activating DTIs to allow banks to lend:
- 20% of owner-occupier lending to borrowers with a LVR greater than 80% (up from 15% of lending), and
- 5% of investor lending to borrowers with a LVR greater than 70% (up from an LVR of 65%).
These proposed DTI settings are not currently restrictive. The RBNZ published data showing that banks are currently lending less than 10% of new loans to households of a DTI greater than 6 and investors of a DTI greater than 7. Hence, we don’t anticipate much immediate impact on housing lending trends.
The situation could change if house prices were to rise significantly relative to incomes (for example over the next couple of years). We expect house prices to rise by around 8% over 2024 and a further 6% in 2025, versus around 5 % and 3% growth in nominal wages over 2024 and 2025 respectively. Today’s announcement has not changed our forecast for house price growth. The DTI settings would also be more likely become binding if mortgage interest rates were to fall sharply, allowing borrowers to service higher debt levels.
Unlike the LVR restrictions, the calibration of which the RBNZ has adjusted over the course of the cycle, the RBNZ intend that the proposed DTI settings endure across the economic cycle. This reflects the fact that the DTI restrictions will automatically become more restrictive during a typical housing boom.
Right now, the RBNZ has consistently indicated that they do not see house prices as unsustainable – hence this move should not be interpreted as an indication of dissatisfaction with housing market trends at the current time. Based on Westpac’s forecasts, DTIs should move higher in coming years and hence the new restrictions could come closer to being binding. Lower interest rates and changes in investor tax deductibility could further fuel increased DTI lending.
At the same time as implementing DTI restrictions, the RBNZ is proposing to reduce LVR settings further. This is another modest adjustment that we think is consistent with the RBNZ taking the opportunity to move LVR settings towards a more neutral level. Reducing LVR restrictions now when house prices are at sustainable levels allows room for tightening if that situation were to change in future years.
We don’t take anything from this move for the RBNZ’s view on the appropriateness of the OCR. The RBNZ has consistently seen LVR and DTI tools as financial stability not inflation control tools. Rather, this is a move to add another “iron to the bag” if financial stability concerns resurface.
Media contact
Kelly Eckhold, Chief Economist
+64 21 786 758
kelly.eckhold@westpac.co.nz
X: @kellyenz
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