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The Case For DTI Rules

A leading property economist takes a close look at how the restrictions might affect New Zealand.

By: Sally Lindsay

6 February 2024

A leading property economist takes a close look at how the restrictions might affect New Zealand.

As the Reserve Bank gears up to start consulting on the level, possible exemptions and speed limits it will set for debt-to-income restrictions, CoreLogic chief property economist Kelvin Davidson says it’s difficult to know whether they have worked or not in other countries.

Ireland and the UK have DTI caps of between three-and-a-half and four-and-a-half times income and in the UK banks can only advance up to 15 per cent of the number of new mortgages at a DTI greater than 4.5.

Because New Zealand did not have DTIs during 2020 and 2021 when the RBNZ temporarily suspended LVR rules because of fears the pandemic would mean a plummeting housing market and wrecked economy, house prices actually rose 45 per cent compared to increases of about 25 to 30 per cent in Australia, Canada, the UK, United States, Germany, Sweden and the Netherlands, bank services firm Macquarie has found.

It led to New Zealand’s housing market being dubbed a “canary in the coal mine” by overseas economists.

Housing Scene

Davidson says a case can definitely be made for DTIs in New Zealand, but it is difficult to know if they have worked in other countries as the counter factual is unknown.

In the UK, DTIs were imposed in June 2014. House prices rose 6 per cent in 2015 and values in most of London’s property market rose 8.2 per cent in the year to May 2016. While British experts argued without the DTI these price rises would have been greater, no-one could prove that either way.

Davidson expects the RBNZ to set the DTI at seven times a borrower’s income, which while high by international standards, reflects the high cost of New Zealand housing. “If it is set too low it is going to completely scuttle the market.”

A recent Bank of International Settlements case study on NZ’s loan-to-value ratios experience written by two Reserve Bank researchers says their analysis indicates debt servicing restrictions, and specifically DTI ratios, are the most effective in supporting financial stability and sustainable house prices, while having a smaller impact on first-time buyers than on investors.

As DTI restrictions link credit availability to income, they are seen to be more effective in constraining debt levels throughout the housing cycle compared with other macroprudential tools.

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