It was Steven Joyce’s first substantial act as Finance Minister, and a strategically important one for the Government.
Just a week after his new Prime Minister Bill English announced the election would be held on September 23, Joyce announced the Reserve Bank would have to carry out a full cost and benefit analysis of its idea mooted last year of limiting the size of mortgages to a certain multiple of income – known as the Debt to Income Multiple (DTI).
At face value this seemed like an arcane decision that few other than finance industry geeks and a few central bankers would care about.
Actually, the DTI is every mortgage broker’s nightmare, and a big political risk for the Government. The impact on the housing market would be much deeper than the three rounds of Loan to Value Ratio (LVR) controls that have each slowed the market only slightly and briefly.
Reserve Bank figures show that more than 60 percent of landlords have borrowed more than six times their incomes. That means a limit similar to the 4.5 times limit imposed by the Bank of England or the 3.5 multiple used by Ireland’s central bank would stop that borrowing dead in its tracks.
Campbell Hastie of Go2Guys Mortgage Advisors in Auckland said a limit of three to four times income would have a major impact.
“That would totally crush the market, which is not what the Reserve Bank should be looking to do,” he said when the Reserve Bank was discussing it late last year.
The banks are understandably nervous, as was demonstrated early this year in comments to KPMG in its annual Financial Institutions Performance Survey showing the horse has well and truly bolted.
KPMG reported bank executives had said they viewed a DTI limit threshold of five to seven as ideal for New Zealand circumstances, although they cautioned it could hit first home buyers in particular. The Reserve Bank has not said it would exempt first home buyers in the use of any tool, but has targeted landlords in its last two versions of its loan to value ratio limits.
“When asked about the implementation of debt to income (DTI) tools, executives are in unanimous agreement that the RBNZ’s consideration of DTI measures are taking place a bit late in the cycle, as current DTI ratios have already exceeded levels that would have been considered ideal,” KPMG said.
“According to executives, an ideal DTI level would be five to seven. However, they say most borrowers are already at levels of nine to 12,” it said.
That is the dirty little secret of the debate about the DTI: anything close to levels used overseas would stop lending to home buyers dead.
Joyce’s decision to deny the Reserve Bank’s request for the immediate inclusion of the DTI in the bank’s Macro-Prudential tool kit meant any introduction would not come until well into next year, and well after any election. The full analysis will have to be done before it can be included in the kit and then the Reserve Bank will have to carry out another consultation with the banks.
Before John Key resigned and Joyce moved into the Finance role, the Reserve Bank had been in active discussions with English about including the DTI in the kit. Governor Graeme Wheeler said on November 30 he expected to meet English again within weeks about finalising its inclusion in the tool kit.
However, the introduction of a DTI before the election was no sure thing, even if English had approved it before Key resigned.
The other factor holding the Reserve Bank back is the cooling of the Auckland housing market since August, when the bank’s new 40 percent deposit requirement for landlords started to flow through to the market.
Governor Wheeler said in February that even if he had the DTI tool, he would not use it because of the moderation in house price inflation rates in late 2016. He pointed out that Auckland house price inflation had slowed to 0.3 percent a month in the last three months to December. Real Estate Institute figures published after Wheeler’s comments showed a seven percent fall in the best measure of median house prices in Auckland in January.
“We approached the government to see if we could have debt to income measures introduced into the macro-prudential toolkit and the government’s made it clear – and we’re very encouraged to have a response – they would like us to go and consult on that and we’ll certainly do that,” Wheeler said.
“They have asked us to be very clear about the costs and benefits of that instrument and that’s something that we’re are also very happy to do. We’ve also been quite clear that, even if we put that in the macro prudential policy toolkit, we’ve indicated that we wouldn’t necessarily use it at this point in time because we have been encouraged by what we been seen about this house price moderation.”
However, he also made clear the bank would have preferred to have been able to put the DTI in the toolkit before doing the analysis and consultation, just in case prices took off again in a hurry.
Regardless, the DTI is in cold storage for now. The moment of truth will be early in 2018 and will depend on whether house price inflation takes off again during the February to April period. It has done just that twice in the last three years.
Net migration remains at record highs and Auckland is still 40,000 houses short of requirements. Interest rates remain low and the economy is generating strong jobs growth.
The bank may yet have to deploy yet another tool to fight the fire in New Zealand’s housing market, and keep the banking system safe from having too many leveraged home owners.
But it won’t be able to do it before home owners get a chance to vote.