Negatives of debt-to-income loans outlined

The Property Institute has slated a proposal by the Reserve Bank that it be given powers to impose debt-to-income limits on mortgage lending, saying it could inflict "significant damage" to the Auckland housing market and the wider economy.

First-home buyers, renters and small businesses seeking to raise equity against their homes could also be in the firing line, the institute said.

Last week, the Reserve Bank released a consultation paper proposing it have the ability to impose debt-to-income (DTI) limits restraining bank lending to five times a household’s income. At present, 27% of mortgage lending has a DTI of six times income and a further 13% is between five and six times incomes.

Property Institute of New Zealand chief executive Ashley Church said if the Government gave the Reserve Bank the power to impose DTIs, it would have "serious and unintended consequences" for Auckland’s property market and would "almost certainly make the Auckland housing crisis even 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 build or buy them would dwindle to a trickle.

"The policy could very well kill off the one thing that can fix the Auckland housing crisis — the construction of new homes," he said.

The Reserve Bank at present is using a loan to value ratio (LVR) restriction across the country where property investors must have a minimum 40% deposit, and a DTI would become another "macro-prudential tool" for the central bank to wield in its attempts to contain soaring house prices.

Mr Church said an introduction of DTI limits would create a further barrier to young people looking to buy their first home — "a prospect already made almost impossible by the Reserve Bank clampdown on loan-to-value [LVR] lending".

Labour’s finance spokesman Grant Robertson said Labour did not support DTI, and its introduction "across-the-board" would punish first-home buyers struggling to get into the housing market.

"There may be scope to introduce limits that focused on speculators who are responsible for the vast bulk of high debt to income borrowing," Mr Robertson said in a statement.

Labour’s plan to start to fix the housing crisis was building more affordable homes and "cracking down" on speculators driving up prices.

Mr Church further highlighted imposition of DTI would restrict, or eliminate, the ability of small business owners to use their home equity as a security for cash-flow, which could potentially put thousands of small businesses at risk.

The Reserve Bank had estimated in its paper DTIs would block 11,100 mortgages annually; affecting 8800 investors, 1600 first-home buyers and 700 other owner-occupiers.

A similar policy, introduced in the United Kingdom in July 2014, theoretically restricted a house buyer to a mortgage which did  not exceed 4.5 times annual earnings.

"However, the UK policy isn’t compulsory on the banks and only applies to a section of the market," Mr Church said.

The British "wisely chose" to use this tool as a way to protect those  most at risk of a market crash, as opposed to New Zealand’s Reserve Bank using it as a "blunt tool to curb house price inflation".

Mr Church said a DTI policy would also lead to  dramatic rent increases over a relatively short time, as property investors strove to increase their income to be able to buy more property.

Mr Church said he understood the Reserve Bank’s desire to protect the economy against the risk of financial shock, but anything which reduced construction was a "hollow solution" because it would only delay a bigger problem in the future.

simon.hartley@odt.co.nz

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