Government gives firm direction that new lending limits – if and when they are required – should not apply to first home buyers
The Finance Minister has approved lending limits for home loan borrowers who lack sufficient income to guarantee repayments in tough times.
But Grant Robertson wants the new debt-to-income limits targeted at property investors: he has set a condition that when the Reserve Bank implements the new lending limits, they are designed to avoid an impact – as much as possible – on first home buyers.
There is uncertainty about whether he intends other home buyers to be subject the new limits. His notes to the Reserve Bank show he has agreed, in principle, to the debt serviceability restrictions, “on the condition that it is understood that the Minister’s agreement is predicated on any implementation being designed to avoid impact, as much as possible, to first home buyers”.
“I retain the view that the development and design of any debt serviceability tool such as a debt-to-income ratio limit should apply only to investors.”
– Grant Robertson, Finance Minister
But in his media statement, he also rules out any impact on other owner-occupiers, as well. “I retain the view that the development and design of any debt serviceability tool such as a debt-to-income ratio limit should apply only to investors.”
His apparent determination to specifically target investors with the lending limits is already being criticised by investor media.
“The step closer to DTIs is the latest blow to investors following the Government’s radical housing reforms,” says The Mortgage Mag. “Landlords have been hit with an extension to the bright-line test, and the planned removal of deductibility of interest payments, as ministers look to crack down on investor activity.”
The Reserve Bank says a debt-to-income limit is likely to be the most effective additional tool it can deploy, to support financial stability and house price sustainability.
It comes after Real Estate Institute data, published just 24 hours earlier, showed previous government and Reserve Bank measures were failing to rein in house prices. The median house price nationwide has risen $200,000 in the past 12 months.
Robertson, who had previously referred to property investors as “speculators”, today reiterated that he still held the view that the development and design of a tool like debt-to-income limits should apply only to investors.
“The Reserve Bank has clearly stated that there is no immediate plan to use DTIs and any decision to do so would only happen after a full public consultation,” he noted. “The Government has already put in place a number of measures to cool the housing market and it’s important to give these initiatives time to assess their impact.”
Michael Gordon, acting chief economist at Westpac NZ, said in a note this morning that lending data showed an emerging switch from investors to home buyers – though not just first home buyers.
Mortgage lending figures had held up but, within that, lending to investors had declined over several months. He said that likely reflected the reintroduction of loan-to-value restrictions, which banks had already begun applying even before the official start date of March 1.
“Lending to home buyers actually rose further in April,” he said. “Considering that home buyers have also been subject to a tightening in LVR restrictions (just not as much as for investors), that’s a pretty impressive performance.”
Reserve Bank Governor Adrian Orr said the bank’s analysis demonstrated that any such debt-to-income restrictions would impact investors most powerfully while having limited impact on first home buyers.
It would be a complementary tool to mortgage loan-to-value ratio restrictions, as they addressed different dimensions of housing-related risk. DTIs reduced the likelihood of mortgage defaults while LVRs largely reduced losses to banks if borrowers defaulted.
“We believe that a ‘sustainable house price’ is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates.”
– Adrian Orr, Reserve Bank
The Reserve Bank and the Treasury plan to work together to update the wording for the bank’s memorandum of understanding, which will need to be approved by the minister.
“Although we do not have a remit to target house prices directly, our financial policy tools can help to ensure prices do not deviate too far from sustainable levels,” Orr said.
“We believe that a ‘sustainable house price’ is the level that the price would be expected to move towards over several years, reflecting the underlying drivers of supply and demand for housing, including population growth, building costs, land supply, and interest rates.”
Over the next few months, they would talk to banks and other lenders about how a debt-to-income limit could be implemented, as well as any other debt servicing restrictions deemed necessary. Any finals decision on setting in place new restrictions would be preceded by a full public consultation process, along with a Regulatory Impact Assessment.
There are no plans to set limits on interest-only mortgages, which the minister had expressed concern about.
“I have accepted the Reserve Bank’s advice on interest-only lending, which will not be included in the memorandum of understanding,” Robertson said today.
“The Bank notes the use of interest-only lending has been trending downwards since 2016 for both investors and owner-occupiers. The Government’s interest deductibility changes are likely to separately and significantly reduce demand for interest-only lending among investors.”
Even before the new debt-to-income tool was announced today, Westpac’s economics team was taking a stronger line than other economists on the likelihood of house prices flatlining – and perhaps even dropping.
“We suspect there’s a little too much reliance on the idea that the Government won’t allow house prices to fall because it’s politically unpalatable – housing makes up the majority of households’ wealth in New Zealand,” Michael Gordon said.
“But that gives the Government too much credit – if it really had that degree of control over house prices, would it have allowed them to rise by 30 percent in a single year?”
