Unintended consequences

The Reserve Bank yesterday announced that it has officially asked Finance Minister Bill English for the power to introduce debt-to-income (DTI) ratios for mortgage seekers.

English said the government would not grant such powers lightly as they represented a “significant policy change which has never been tested in New Zealand”.

But, within the property sector, there are concerns about exactly what sort of impact DTI ratios would have.

Property Institute chief executive Ashley Church said they have the potential to do significant damage to the Auckland housing market, and wider economy.

“These things often sound like good ideas until you start thinking through what would happen if they were actually implemented.”

He believes the probable consequences of such a policy would be disastrous and would make Auckland’s housing crisis worse.

“The number of new homes being built – the very thing that Auckland needs most – would plunge as the number of people earning enough to buy them would dwindle to a trickle.

“So the policy could very well kill off the one thing that can fix the Auckland housing crisis: the construction of new homes”.

DTIs would also lead to a dramatic increase in rents over a relatively short space of time as property investors looked for ways to increase income so as to be able to buy more property, he said.

“Most landlords are currently showing restraint and choosing to accept lower returns because capital growth is strong.

“But in an environment where every extra dollar enhances borrowing power, landlords will want to maximum rentals and they’ll be able to do it because the policy will exacerbate the current housing shortage.”

The UK has a DTI policy, which limits mortgage seekers to a loan not more than 4.5 times their annual income, but Church said it isn’t compulsory for banks and only applies to a section of the market.

“The Brits wisely chose to use this tool as a way to protect those who were at most risk of a market crash rather than as a blunt tool to curb house price inflation.”

Church said the current market slowdown is only temporary as the fundamentals driving house price growth still haven’t changed.

“Artificial solutions such as DTI clampdowns will only slow down the speed at which the problem is solved.

“The only sustainable way to fix the Auckland housing crisis is to build more homes as quickly as possible.”

NZ Property Investors’ Federation executive officer Andrew King is also not convinced of the wisdom of DTI ratios.

He said that they would make it harder for homebuyers across the board and that is not necessarily a good thing.

“But another point to consider is that, to date, the various lending restrictions imposed have actually restricted lending for housing significantly.

“That is making it harder for properties to get built. And that is exactly what you don’t want at a time when the market, particularly in Auckland, is struggling with an under-supply of housing.”

Both the Reserve Bank and the government need to be mindful of policies that they introduce because they can have unintended consequences that are not wanted, King said.