According to the Treasury papers, DTIs are an alternative macro-prudential tool that could offer an alternative, or additional, way of managing financial system vulnerability by targeting the likelihood of default.
DTIs can be difficult to implement in practice, which is why LVRs were chosen in 2013, the papers said.
“We welcome the RBNZ’s work on DTI data since then, and look forward to the developments in this area.”
Earlier this year, the RBNZ’s Bernard Hodgetts told media the bank was doing work on the debt-to-income ratios of residential property owners.
At the time, he said the RBNZ had no plans for any debt-to-income type measures – although it was trying to establish what might be possible in that area.
For investors, the introduction of DTIs could pose some problems.
Mortgage broker Campbell Hastie, from Go2Guys, said he is more of a fan of DTIs than of LVR restrictions.
This is because there are plenty of potential buyers out there who don’t have the necessary deposit, but who are fully capable of servicing a substantial mortgage.
However, for investors, DTI measures would assess part of their income as the rent they are getting from their properties and this could impact on their serviceability.
“Potentially, DTIs could restrict or restrain the activities of some investors,” he said.
“Many property owners in Auckland have a fair bit of equity now and might be a bit bullish. If you put an income test in front of them it could slow them down a bit.”
Infometrics managing director Gareth Kiernan said DTIs were another way to tackle the risks that could flow from Auckland’s housing market.
But he suspected it would probably be a more difficult policy to pursue [than LVR restrictions] when it comes to investors.
“How do you define the income of an investor? Some rental income would have to be taken into account. But, if they own multiple properties, how do you treat any other salary that they might earn?”
Kiernan said the policy could have a big impact on property owners who were heavily leveraged.
Applying DTIs to owner-occupiers would be easier, but they are still not as clear as LVR restrictions, he said.
“For this reason, the Reserve Bank might be doing some work on them, but they might be in the too-hard basket.”
At the coalface, it wouldn’t be too difficult for banks to implement DTIs when lending, Massey University banking expert David Tripe said.
“They would need to get the details of the borrowers’ income, as they do now, and they would include them as part of their calculations regarding the loan.”
Banks would need to make sure they were receiving the correct information and, as with any regulatory controls, there would be some practical challenges.
Tripe said that if a DTIs policy was pursued there would have to be precise rules around the way it was operated and the criteria employed to ensure there was no unfairness in assessment.
“But it is certainly not impossible. The possibility of introducing DTIs is being investigated in overseas jurisdictions. For example, Hong Kong is looking at them, as is the Bank of England.”
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