Devil In The (Missing) Detail
30 June 2016
The introduction of debt-to-income ratios looks increasingly likely, leaving investor advocates questioning what that might mean in practice.
The Reserve Bank remains concerned about the heated nature of the country’s housing market and is looking at further macro-prudential tools to try and reign in investors.
In June, Governor Graeme Wheeler confirmed the Bank is doing work on debt-to-income ratios and has raised the possibility of their introduction with the Government.
Debt-to-income ratios restrict the amount someone can borrow for a property based on the income they earn. They are used in the UK where borrowers are restricted to mortgages no higher than 4.5 times their annual income.
Rental Market Impact
The possibility of their introduction concerns investor advocates who say they could force many investors out of the market and impact on the rental market.
Property Institute chief executive Ashley Church says the impact of any debtto- income ratios would depend on the level at which they are set.
“If they are applied at less than the current multiple in Auckland, which is 9… for example, at the UK level, that could kill the market,” Church says.
In his view, the impact of debt-to income ratios would depend on the level they are set at, how they are structured, and whether they are universal or whether there are exemptions.
“For example, they could structure them so that the more prolific investors are slowed down, but mum and dad investors and first home buyers could still buy.” Graeme Wheeler
Debt-to-income ratios could have unintended consequences for the rental market, he says. “If the policy is a permanent one, it would lead to a mass shortage of rental accommodation.
“More immediately, it could lead to a dramatic increase in rents over a relatively short space of time as investors look for ways to increase their income so as to be able to buy more property.”
For Auckland Property Investors' Association president Andrew Bruce, the devil of any such policy is in the detail – and there hasn’t been any to date.
He says it all comes down to the level at which the Reserve Bank pitches debt-toincome ratios.
“How will they deal with the growing numbers of people who are self-employed and contractors and having fluctuating incomes, as many investors do? How will that side of things work?
“Because you can’t have a situation where the bank comes in and says, ‘Sorry, you’ll have to pay up now, or pay X amount more this year’, because your salary doesn’t meet the bank’s covenants this year.”
Bruce says he is very cautious about the proposal and will remain so until more detail is available. Banks more than investors could, however, suffer most from the introduction of debt-to-income ratios.
Mortgage Supply Company director Jenny Campbell says a large amount of the big banks' lending business would be affected if investors are pushed out of the market.
The big banks might be tightening their lending policies in a bid to dampen investor appetite but that’s likely to be part of an effort to avoid the introduction of debt-to-income ratios, she says. “Investors, on the other hand, could still look to non-bank lenders if such ratios are introduced.
“Non-bank lenders are already looking at how they can capitalise on that and get some good, fairly priced products out for investors that will help them to continue to grow and manage their portfolios.”