Government and Reserve Bank agree on tougher loan-to-value constraints and new debt-to-income limits to cool the housing market and protect homebuyers.
The central bank is to start consulting on reducing low deposit lending by banks to no more than 10 percent of their total lending, from the current 20 percent, says Finance Minister Grant Robertson. The measure will come into force on October 1.
The government has also given RBNZ approval for debt-to-income ratios or interest rate floors, to ensure borrowers can afford to service mortgages.
“This change will ensure that the Reserve Bank has the flexibility to respond to emerging financial stability risks and deploy appropriate tools as required,” Robertson said.
He said debt-to-income ratios would be designed to minimise any negative effect on first home buyers, with consultation starting in October.
Mortgage broker and chief executive of Squirrel John Bolton said reducing the amount of lending to low deposit borrowers would impact first home buyers.
“A lot of first home buyers we see have less than 20 percent deposit, that will tighten that up a little bit, the Reserve Bank sees that as a little bit of a risky space.”
“Once you start getting up to six times your income that’s really starting to enter that space when you’re having baked beans for dinner.”
– John Bolton, Squirrel
He said introducing debt to income restrictions could hit property investors in the pocket, rather than first home buyers who are usually considering properties about five times their incomes.
“Once you start getting up to six times your income that’s really starting to enter that space when you’re having baked beans for dinner. The Reserve Bank has been signalling around that six times income, which is why I’m saying it won’t impact too much on first home buyers.”
The moves followed changes made at the start of the year to cool the housing market, which have proved largely ineffective in slowing the 20 percent annual growth in house prices.
“We’ve already made adjustments to loan-to-value ratio restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending. If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.”
– Geoff Bascand, Reserve Bank
Reserve Bank deputy governor Geoff Bascand said the further restrictions were needed to ensure the financial system was strong, and borrowers able to cope with any economic and financial pressures such as rising interest rates.
“We’ve already made adjustments to loan-to-value ratio restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending,” Bascand said.
“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.”
The Bank will consult on the debt-to-income ratios and interest rate floors from October, a process it said would take at least three months.
Robertson said the aim of the previous and new moves has been to improve the affordability for first-home buyers. Earlier moves have been aimed at property investors.
Robertson said they had also clarified in the memorandum that the bank would need to avoid negative impacts on first-home buyers where possible.
“I believe this agreed wording will set clear public expectations while maintaining the operational independence of the Reserve Bank. It is still up to the Reserve Bank how it chooses to introduce any restrictions, having had regard to this condition,” Robertson said.
“Fewer buyers will be able to get into the market with less than a 20 percent deposit and that is going to mean there’s going to be less demand, so it should create some downward pressure on house prices.”
– Nick Goodall, CoreLogic
CoreLogic head of research Nick Goodall said the prospect of new lending restrictions had come as a shock, because they were likely to hurt first-home buyers
“Fewer buyers will be able to get into the market with less than a 20 percent deposit and that is going to mean there’s going to be less demand, so it should create some downward pressure on house prices.”
That would affect first-home buyers the most because they often found it difficult to save enough for deposit, he said.
Goodall said he did not expect debt-to-income ratios to come into effect this year.
This article first appeared on RNZ and is republished with permission.
