RBNZ renews push for DTIs

Wednesday 31 May 2017

UPDATED: Ongoing risks posed by the housing market mean the Reserve Bank is set to start consulting on the addition of debt-to-income ratios (DTIs) to its policy toolkit.

The Reserve Bank released its latest Financial Stability Report (FSR) today and it remains concerned about the risk the housing market poses to the country’s financial system.

While the FSR acknowledges that the risk posed by the housing market has reduced, it states that the outlook for the market remains uncertain.

Reserve Bank Governor Graeme Wheeler said house price growth has slowed in the past eight months in response to tighter LVR restrictions and a tightening in credit and affordability pressures.

“While residential building activity has continued to increase, the rate of house building remains insufficient to meet rapid population growth and the existing housing shortage.

“House prices remain elevated relative to incomes and rents, and a further resurgence would be of real concern given existing affordability constraints.”

The LVRs have increased the banks’ resilience to any fall in house prices, but a significant share of households have taken on loans at high DTI ratios, he said.

In the bank’s view, such borrowers are more vulnerable to an increase in interest rates or a decline in income.

Further, an economic downturn could materially weaken the financial position of these households, which could exacerbate a fall in house prices if they are forced to sell their properties.

For this reason, the Reserve Bank is pushing on with its drive to add DTI restrictions to their macro-prudential toolkit – and is likely to release a consultation paper on the proposal in the next couple of weeks.

If a DTI tool was available, the Reserve Bank would not apply it at this stage, given that LVR restrictions appear to be mitigating housing risks, the FSR stated.

“However, demand drivers in the housing market remain strong, and a resurgence in house prices remains possible.

“Should high house price growth return and the proportion of housing lending at high DTI ratios remains high, a DTI restriction could be warranted.”

In the FSR media conference, Deputy Governor Grant Spencer said that a DTI tool wouldn’t necessarily have a determined threshold attached to it.

“However, we think if a ratio gets up over five that's pretty high. And it tends to be the area where potential stresses are going to emerge if there's a shock to interest rates or incomes."

While there has been no decision on thresholds, the Reserve Bank does like the concept of DTI “speed limits” to restrict the amount of high DTI lending that banks could do.

Spencer also said that while investors who have high DTI ratios are, potentially, more vulnerable to any stresses, it was not likely that a DTI tool would feature something targeting investors.

This was because the latest investor-focused LVRs have already placed restraints on investor credit which have actually reduced the overall DTIs.

The Reserve Bank has long been keen to introduce DTIs to its toolkit, but the government has been less enthusiastic and, earlier this year, ordered a cost benefit analysis first.

While the IMF leant its support to the proposal in its recent report on New Zealand, the proposal has generated some fierce opposition from local critics.

This time round, Westpac acting chief economist Michael Gordon said that, regardless of the merits or otherwise of this policy tool, he doesn’t think there will be a case for applying DTI limits any time soon.

“The housing market has slowed significantly as mortgage rates have risen from their lows and our view is that the slowdown will ‘stick’ this time.

“Unlike previous episodes such as in 2014, when mortgages rates rose then fell again, we expect interest rates will continue to push higher as global interest rates head higher and local banks compete harder for funding.”

Westpac expects the national average house price to rise just 3% this year, as compared to nearly 14% last year, he added.

ASB chief economist Nick Tuffley said there was little new in the FSR – including new measures relating to housing.

While the Reserve Bank acknowledged that housing market vulnerabilities are one of the key risks to financial stability, it also noted that the housing market has cooled off since late last year, he said.

“Whether the market remains that way is another question, but our expectation is that future price growth will be constrained up and down the country. 

“And that means little urgency for further macro-prudential action”

With no fresh macro-prudential action and creation of a DTI tool still some way off, there are no fresh implications for the OCR or the housing market from the May FSR, he said.

Overall, the FSR assessed New Zealand’s financial system as sound and the banking system as operating efficiently with strong capital and funding buffers and robust profitability.

But the system does continue to face risks – although those risks have reduced in recent months, Wheeler said.

“A sharp reversal in risk sentiment could lead to higher funding costs for New Zealand banks and an increase in domestic borrowing costs.

“New Zealand’s banks are vulnerable to these risks because of their increasing reliance on offshore funding for credit growth.”

Read more:

DTIs should be in RBNZ toolkit – IMF 

Addressing housing market risk 

DTIs not on the cards yet – RBNZ 

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