DTIs cost benefit analysis ordered

Wednesday 8 February 2017

Another obstacle has been placed in the Reserve Bank’s path towards the introduction of debt-to-income ratios (DTIs).

Finance Minister Stephen Joyce has told the Reserve Bank to conduct a full cost-benefit analysis, along with a public consultation, on DTIs before any decision is made on their use.

Joyce said he has discussed DTIs with Reserve Bank governor Graeme Wheeler who is concerned about the levels of debt in some households given recent increases in house prices.

“I have decided that, consistent with good regulatory principles, a full cost-benefit analysis and consultation with the public should occur before I consider whether to amend the Memorandum of Understanding (MOU) on macro-prudential policy.”

Given the novel nature of a DTI tool and the fact there are a number of possible policy actions the Reserve Bank could take, it is important the costs and benefits of the different policy options are adequately and rigorously explored, Joyce said.

While the Reserve Bank has been pushing for the ability to add DTIs to its MOU with the government, the government has been less enthusiastic about their adoption.

Late last year a planned meeting, on DTIs, between the Reserve Bank and then Finance Minister Bill English was delayed indefinitely when English ascended to the role of Prime Minister.

At the time, economists said the delay meant it would be unlikely that DTIs would be introduced before the end of 2017.

Today’s announcement makes the arrival of DTIs anytime soon even more unlikely.

Joyce said the Reserve Bank already has a number of regulatory tools available to it to address systemic risks it identifies and he is cautious about adding further tools to the toolkit.

“The use of macro-prudential tools can be complex and affect different borrowers in different ways. I am particularly interested in what the impacts could be on first home buyers.”

This development should please critics of the proposed DTIs who have said their introduction could have a severe impact on first home buyers and is likely to impact negatively on attempts to boost housing supply.

Meanwhile, the Reserve Bank is still collecting information about the DTI levels that borrowers are obtaining and assessing the potential case for the use of DTIs.

It has indicated that public consultation on DTIs will commence in March and take place during the first half of 2017.

In the past, Wheeler has refused to be drawn on the level at which a DTI ratio could be set if it is introduced.

He has also said that if the Reserve Bank did have DTI ratios at its disposal, it wouldn’t introduce them at this time.

Read more:

Progress of DTIs stalls  

Addressing housing market risks  

Risks in new RBNZ proposal  

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