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‘Debt-To-Income Restrictions’ Kite Flying High

New restrictions on loan size are currently being investigated, but Tony Alexander says the new proposal is simply buying time.

By: Tony Alexander

31 May 2019

Kite Flying Is A Popular Sport In some countries and an occasional past-time for us Kiwis – perhaps associated with one of the wind related festivals run in Wellington each year. Kite flying is also something which politicians like to do.

It involves putting an idea out into the public arena and seeing what the reaction is. The Prime Minister did this a few weeks ago when he said that maybe a land tax could be applied to foreign owners of property in New Zealand.

We analysts wrote columns speculating on what level such a tax might be at. There was an opinion ventured by many that the Prime Minister must know in advance the data eventually released in early May by Land

Information New Zealand regarding foreign property buying and that the number must be really high. In the event the number turned out to be just 3% though one can make a multitude of adjustments to the data and get something closer to 6%.

But whether the proportion of houses being sold offshore is 3% or 6%, the number seems so low that enough steam has gone out of the foreign buying debate now to let the idea of a land tax be put to bed.

That kite has been grounded. But there is another kite with higher probability of being put in place – debt-to-income restrictions. In Ireland banks cannot lend more than 3.5 times the income of the household borrowing the money to buy a house. In the UK the limit is 4.5 times for most borrowers. The aim of the restriction is to slow the rate of growth in lending for house buying, slow down the pace of house price rises, and reduce the risk to the banking sector of big losses should some nasty global event occur.

The Reserve Bank (RBNZ) has mentioned the idea and the Finance Minister has indicated it is worthy of consideration; in their recent Financial Stability Report, RBNZ estimated the proportion of new loans where debt exceeded five times income.

For investors it was just under 60% and owner occupiers close to 35%. Were limits placed on debtto- income ratios then on the face of it a lot of buyers would be taken out of the market.

Housing Supply Growth

But here is where it pays to note something about such rules and monetary policy in general. All that a central bank can do when it raises interest rates or constrains lending growth is buy time – time for inflationary pressures to change, time for housing supply to grow.

As each month passes with new rules in place potential buyers achieve larger deposits and new sources of money. The question is whether their ability to do this will be slower or faster than growth in housing supply.

In Auckland, given the existing shortage of property and the slow pace of new construction, the chances are that a new rule would have just a temporary impact, as has happened for every other rule change affecting property buyers over the past six years.

Price Rise Resumption

Were limits of loan size compared with household income introduced we would expect to see the Auckland housing market slow down and prices flatten out. But unless migration flows stalled and construction boomed, price rises would likely resume within a relatively short period of time.

Outside Auckland new lending restrictions would likely have a stronger impact because of the lack of shortages such as Auckland has, and the supply response already evident in consents issued for new dwellings to be built.

Ultimately it comes down to how stringent the new rule would be. The Reserve Bank appears to be undertaking research on the matter and if we continue to see firm rises in Auckland’s house prices in particular, then a new rule could be with us by year end or perhaps early-2017.

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