Positive Money has put in a submission on the Reserve Bank’s plans to introduce debt-to-income ratios (DTIs) by mid year. Debt-to-income ratios aim to restrict residential mortgage credit so that repayments stay within a multiple of the borrower’s income, a key measure of affordability.

We strongly support this long-overdue policy to restrain excessive bank credit in the housing market but raised several concerns about its proposed implementation.

Chief among our concerns is the Bank’s evident watering down of the settings so that the ease of getting a mortgage will be little changed in most situations and investors will have a big advantage over owner-occupiers.

This watering down of the potential impact is loudly signalled in the title of the Reserve Bank’s Consultation Paper: Enhancing the efficiency of macroprudential policy. “Efficiency” in this document refers to the ease of getting a loan which is odd, given that the aim of DTIs should be to put some sand in the gears of residential lending, not make it easier. 

Our worry is that the emphasis on enhancing efficiency points to pushback from banks and an unseemly effort by RBNZ not to upset them. 

It will be a missed opportunity if DTIs proceed on the currently proposed terms, especially to begin tackling the high levels of mortgage debt and house prices that have built up over decades and will need years of tighter credit to unwind.

To help address this, we proposed that the introduction of DTIs be accompanied by a target for mortgage credit growth. Credit growth has outpaced wage growth in recent decades and needs to be reined in. Our proposed target is that credit growth should be no more than 50% of wage growth and that it be added to the quarterly review of DTI compliance.

We also pressed our concerns about having separate rules for investors that will give them an advantage over owner-occupiers and first home buyers, and will push up house prices. 

Under the proposed rules – a debt-to-income ratio of 6 for owner-occupiers and 7 for investors – an owner-occupier with a $100,000 household income will be able to borrow $600,000. But an investor with the same $100,000 income, buying a property with a 30,000 rental income, will be able to borrow $910,000. That’s a massive 50% more financial firepower than the owner-occupier would have.

It’s well-known that New Zealand’s housing affordability statistics are among the worst in the world. Yet the role that decades of loose bank lending has played remains largely off the radar, including in the Reserve Bank’s own analyses. 

So the introduction of DTIs provides an acknowledgement – albeit reluctant and tacit – that credit availability is part of the problem and a debt-to-income tool can help to moderate it. 

The paper also has a welcome acknowledgement that the Bank’s own monetary policies have contributed to the problem – as Positive Money has been pointing out for years.

As we noted in the conclusion to our submission:

Overall, Positive Money is pleased that the debt-to-income ratio tool has finally reached implementation stage – it’s been sorely needed and a long time coming. 

But we are disappointed that the approach outlined in the Consultation Paper places “enhancing efficiency”, i.e. lowering barriers to lending, over fixing financial stability, housing affordability and the economic efficiency of our financial system.

We hope that the Reserve Bank uses the consultation period to address this shortcoming and gives the DTI tool the best chance to realise its full potential.

You can download the consultation paper and see our responses to its proposals.

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