DTIs “perversely restrictive” for investors – report

Monday 14 August 2017

The Reserve Bank’s debt-to-income ratio (DTIs) proposals are flawed and would have perverse outcomes for investors, according to a new report from TailRisk Economics.

By Miriam Bell

After analysing the Reserve Bank’s justifications and evidence for debt-to-income ratios, the report finds that the DTIs approach is misconceived and the justifications for it are deeply flawed.

TailRisk Economics principal Ian Harrison said the main problem is that DTIs are a crude tool that don’t adequately assess borrowers’ debt servicing capacities and will perversely target many better quality loans.

“The Reserve Bank has presented no substantive evidence that higher DTI loans are ‘excessively’ risky, or that a DTI ratio of 5 is a sensible cut-off.

“But there is significant evidence that DTIs do not predict loan defaults, or reduce the likelihood or severity of crises.”

For example, the European Systemic Risk Board found that DTI levels did not have any “relevant effect either on the prediction of the crisis or on the depth of the Global Financial Crisis”.

Harrison, who has previously questioned the Government’s work on earthquake strengthening and MBIE’s calculation of insulation benefits, was particularly critical of the application of DTIs to investor loans.

The application of DTIs to investor loans, which are the primary focus of the policy, is misconceived because DTIs are only intended to apply to owner-occupier borrowers, he said.

“The DTI measure assumes that when investors purchase new properties their living expenses increase – but this simply does not make sense.

“The effect of the policy could be to impose an effective LVR limit as low as 30% on professional investors. Yet no other country has imposed DTI restrictions on investor loans.

“This would generate perversely restrictive outcomes for this group.”

Harrison said higher future interest rates do not pose a material systemic risk, providing the conduct of monetary policy is competent.

“Further, the Reserve Bank’s assessment that the restrictions would have a net welfare benefit, understates the costs and relies on a number of key assumptions, in particular a 25% chance that there will be a crisis in the next five years, with house prices falling by 40% to 50%.

“Our assessment is that the restrictions will have a welfare cost, like most misconceived quantitative interventions.”

In his view, there are simpler, and less distortionary, ways of targeting excessive house price rises and to ensure that bank balance sheets are appropriately resilient.

“Banks could be required to apply a prescribed higher test interest rate to affordability assessments.

“This would provide the Reserve Bank with an interest rate policy tool that can be directed to imbalances in the housing market.”

The Reserve Bank has been pushing for the go-ahead to introduce DTIs into its macro-prudential toolkit for some time – despite significant opposition.

While the Reserve Bank released a consultation paper on its DTI proposals back in June, the fast approaching election means that little progress on them is likely before the end of the year.

At the OCR press conference last week outgoing Reserve Bank governor Graeme Wheeler said the future of the DTIs proposals would come down to consultations between Deputy Governor Grant Spencer and the incoming finance minister post-election.

Read more:

DTIs would cut thousands out of market

RBNZ renews push for DTIs 

Mortgage group writes to finance minister about DTIs 

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