NZ first impressions: RBNZ confirms details of debt-to-income rules
The RBNZ has confirmed the detail of Debt-to-Income (DTI) settings, which will be applied to new lending in line with previous proposals.
- The RBNZ has confirmed the detail of Debt-to-Income (DTI) settings, which will be applied to new lending in line with previous proposals.
- From 1 July 2024, banks will be allowed to lend up to 20% of residential loans to owner occupiers with DTI ratios of over 6 and to investors with a DTI ratio of over 7.
- At the same time as DTIs are introduced, there will be a modest reduction in Loan-to-Value Restrictions (LVRs).
- DTI settings are not currently binding and should have little immediate impact on the housing market.
- 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.
- We don’t see any monetary policy implications from this proposal.
- We expect that housing market activity will remain muted over the next few months, with a more material uplift starting to take hold later this year. The expected uplift is related to ongoing population pressures and expectations for an eventual gradual easing in borrowing costs.
- Marked differences in regional house price to income levels could lead to impacts on investor behaviour as lower-priced regions will be relatively favoured by investors from higher-income regions.
The RBNZ has confirmed that it will implement restrictions on high debt-to-income lending from 1 July 2024. This provides an additional tool to manage potential financial stability risks associated with excessive lending to highly leveraged households and investors.
These restrictions focus on individual borrowers’ ability to service debt (in contrast, the existing restrictions on loan-to-value ratios focused on lenders and aimed to limit the risk of potential losses that could result during housing market downturns).
What restrictions have been introduced?
From 1 July 2024, the following restrictions on bank lending will apply:
- 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.
At the same time, the RBNZ will ease the loan-to-value ratios settings (LVRs). From July 1:
- 20% of bank lending can be to owner-occupiers with a LVR greater than 80% (up from a current level 15% of lending), and
- 5% of bank lending can be to investors with a LVR greater than 70% (up from a current LVR of 65%).
The RBNZ notes the DTI settings are not expected to be binding at the current time, with current lending already well below those limits.
Unlike the LVR restrictions, the calibration of which the RBNZ has adjusted over the course of the cycle, the RBNZ intends that the proposed DTI settings endure across the economic cycle. This reflects the fact that DTI restrictions will automatically become more restrictive during a typical housing boom.
What does today’s announcement mean for house prices?
The RBNZ has noted that the policy is likely to ensure that house prices remain at sustainable levels as credit growth will be more closely linked to income growth.
DTIs will be more binding at times when house prices when rise significantly relative to incomes (as was the case when New Zealand first emerged from the pandemic lockdowns).
DTIs would also become more binding if mortgage interest rates were to fall sharply: although this would improve serviceability, DTI restrictions would still limit how much debt borrowers could take on.
As house price levels relative to income vary significantly across the country, once DTI’s become binding in high price regions, they may incentivise investors from higher income regions to invest in lower house price regions. Lower prices compared to incomes will make it easier to jump the DTI hurdle. Very highly priced regions (for example the Queenstown Lakes region) would be correspondingly disincentivised for both first home buyers and investors (as substantially above average incomes would be required to service a mortgage at a given DTI level). Over time, this may influence investment flows and regional house price trends.
Today’s announcement, which was fully anticipated, has not changed our forecast for house price growth. We expect house prices to rise by around 6% over 2024 and a further 7% in 2025, versus growth in nominal wages of around 2% to 3% over 2024 and 2025. The expected uplift is related to ongoing population pressures and expectations for an eventual gradual easing in borrowing costs. Prices will also be supported by other policies affecting investors’ tax burden.
The RBNZ’s background documents have noted that first home buyers and those on lower incomes are expected to be largely unaffected by the introduction of DTIs. That’s because these borrowers are already subject to other requirements affecting debt serviceability.
Media Contact:
Satish Ranchhod, Senior Economist
P: +64 9 336 5668
M: +64 21 710 852
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