Debt-to-income limits: Reserve Bank looks to restrict lending to house buyers whose debts outstrip income

The Reserve Bank is looking to restrict lending to house buyers whose debts outstrip their income - a tool known as debt-to-income (DTI) ratio limits.

Finance Minister Grant Robertson has agreed "in principle" to allow DTIs, which the Reserve Bank has described as "likely to be the most effective additional tool" to help stabilise ballooning house prices. 

But Robertson said and any decision to implement DTIs would only happen after a full public consultation. It's also his view that DTIs should not impact on first-home buyers and should only apply to investors. 

DTI ratios, as they're known in the mortgage industry, are calculated by dividing all of your monthly financial obligations - including the proposed housing payment - by your total income. The figure is known as your DTI, and under the proposed scheme, it must fall under a certain number in order to qualify for a mortgage. 

The Reserve Bank has not yet provided details about what settings it would apply to DTIs. 

"Over the coming months we will also be discussing with industry the feasibility of implementing a DTI limit and other debt servicing restrictions as part of our financial stability toolkit," the Reserve Bank said in a statement on Wednesday. 

"Any decision on implementing debt serviceability restrictions will be preceded by a full public consultation process."

DTI limits would be "complementary" to LVRs, or loan-to-value ratio restrictions, which cap banks' mortgage lending to borrowers with low deposits. They were introduced back in 2013 to cool the property market but were lifted in April last year to stimulate growth due to COVID-19.

As the property market defied expectations by booming during COVID-19, the Reserve Bank reintroduced LVRs this year. From May, property investors had to front up with a 40 percent deposit - up from 30 percent from March - while owner-occupiers need 20 percent.

The Reserve Bank said DTIs and LVRs would "address different dimensions of housing-related risk", for example: "DTIs reduce the likelihood of mortgage defaults while LVRs largely reduce losses to banks if borrowers default."

ACT's housing spokesperson Brooke van Velden says Robertson "meddling in the demand side of housing" won't solve lack of housing supply. 

She said the only reason DTIs are being discussed "is because Jacinda and Grant have lost control of the housing market and keep trying to blame anyone but themselves". 

"The Government can tinker with the rules all it wants - what it needs to do is actually build houses."

Building consents were at an all-time high last month. Stats NZ data showed that in March, 4128 new homes were consented - the highest number since the 1940s. The Government is also repealing the Resource Management Act, blamed for holding back development of new housing due to its complexity.

But in the meantime, house price growth showz no sign of slowing down. Real Estate Institute data on Tuesday showed residential property prices increased by 32.3 percent from $620,000 in May 2020 to $820,000 in May 2021. 

The Government decreed in February that the Reserve Bank must take house prices into consideration when making its decisions.

Robertson wrote to Reserve Bank Governor Adrian Orr late last year suggesting this course of action. Orr said there could be adverse trade-offs, but Robertson pushed ahead as house prices spiralled out of control.

In March, the Government announced a string of policies to help bring down house prices, including the controversial move to phase out tax deductions on interests costs for rental properties, over four years. 

Property investors immediately threatened to increase rents to make up for the increased costs but Prime Minister Jacinda Ardern stood by the policy, because investors now make up the biggest share of buyers in the housing market. 

The Government also increased the bright-line test - requiring income tax to be paid on any gains from residential property - from five years to 10, however it will be kept at five years for new-build investment properties to help incentivise supply.