Reserve Bank lifts hammer on highly leveraged mortgage borrowers

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In 2021, while the value of housing in New Zealand has increased by around 30%.

A key driver of this extreme price growth was that one-third of mortgage borrowers in 2021 borrowed at an extreme debt-to-income ratio (DTI) of six or more, equating to around $32.6 billion. mortgage dollars:

New Zealand home buyers went into debt in 2021.

This has left thousands of Kiwi borrowers in dire straits as mortgage rates rise and house prices fall.

Accordingly, the Reserve Bank of New Zealand (RBNZ) is preparing a framework that would potentially tighten the limits of the DTI by mid-2023:

We use macroprudential policy to reduce the systemic risk associated with “boom-bust” cycles in which the financial system amplifies a severe downturn in the real economy…

Following the review of submissions, we intend to proceed with the design of a framework to operationalize debt-to-income restrictions (DTIs), in consultation with industry and other stakeholders. We believe that DTI limits are an important additional tool to reduce financial stability risks and support house price sustainability, and would fill a gap that is not covered by existing regulations. We expect to finalize the framework by the end of 2022, so that restrictions can be introduced by mid-2023 if necessary…

Interest.co.nz provided additional context:

“Our modeling indicates that first-time home buyers would be the least affected by a DTI restriction, with investors being the most affected because they tend to borrow at higher DTIs than other groups on average,” Deputy Governor of Reserve Bank and Chief Financial Stability Officer Christian Hawkesby said.

“This aligns with our Memorandum of Understanding with the Finance Minister on macroprudential policy which states that when designing DSRs we will ensure that we avoid negative impacts on first-time home buyers as much as possible. Additionally, the use of speed limits and exemptions can further mitigate any long-term negative impact on first-time homebuyers. »

Imposing DTI limits is obviously sensible as it would limit risks to financial stability, reduce household indebtedness (all other things being equal) and dampen boom/bust cycles in New Zealand property prices. Indeed, the Irish Central Bank imposed a DTI of 3.5 times in 2015 and successfully deleveraged the household sector:

Household debt to GDP ratio

Excessive pandemic leverage is one of the reasons New Zealand households and property prices are now in such a precarious position as interest rates rise. Implementing DTI limits would reduce the likelihood of the same situation happening again.

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