The Reserve Bank has announced the introduction of Debt-to-Income (DTI) restrictions on new lending for residential housing. This is another tool that the Reserve bank has been considering for some time, to sit alongside the existing Loan-to-Value (LVR) restrictions.
The new rules will mean that from July 1, only 20 of new lending to owner-occupiers can be at a DTI ratio above 6, and 20 of new lending to investors can be at a DTI ratio above 7. So a household with the current average household income of $126,411 would be able to borrow up to $758,466.
Phil Mackay
The introduction of these new rules gives the Reserve Bank another tool to maintain the stability of the financial system in NZ. One criticism of the LVR restrictions already in place was that they made lending particularly challenging for first home buyers. Alongside the introduction of the new DTI restrictions, the Reserve Bank has also announced the easing of the LVR rules, which could be good news for younger buyers trying to get a foothold in the market.
Currently up to 15% of banks’ new lending can be to borrowers with less than 20% deposit, from July 1st this can be up to 20% of new lending. Investors also see an easing of LVR restrictions, with a 35% deposit required, down from 40% currently.
The Reserve Bank has said “Having both DTI and LVR restrictions in place at the same time means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system.”
In general terms it seems likely that the new restrictions will reduce investor interest in the housing market, as their ability to leverage existing properties to purchase additional houses will be reduced. Given the current weakness in the market and in particular investor interest, due to high interest rates, it’s unlikely that this will have a strong impact immediately. The Reserve Bank will have considered this factor in the timing of the announcement, but will be expecting the restrictions to act as a ‘speed limit’ on the housing market as interest rates come down.
It is worth noting that the DTI restrictions won’t apply to new builds, the intention being not to unnecessarily constrain new housing supply. This means there is still opportunity for investors to borrow above the DTI limits for new developments and new housing.
Likewise, banks can still make up to 20% of their new lending to owner-occupiers, and 20% of new lending to investors, at higher ratios. Investors with good relationships with their bank may still be able to access finance at higher multiples of their income, and banks have some scope to make exceptions for a limited number of owner-occupiers.
It remains to be seen how this will ultimately play out as interest rates drop and the housing market recovers, particularly given that the government has reinstated interest deductibility for investors.
