- Debt-to-income rules will play a bigger role as mortgage rates fall, as some would-be buyers navigate a new reality.
- There are significant allowances for banks to lend outside the DTI caps and newly built properties are also exempt.
- In addition, those allowances (‘speed limits’) may be reserved for buyers in expensive areas.
- DTIs are also about financial stability and should help housing affordability over time.
- As such, while DTIs are a meaningful change, most buyers should still ‘find a way’.
Even casual followers of the housing market will know about new caps in place that limit borrowers’ loan sizes in relation to their income: debt-to-income (DTI) ratio limits.
These came into existence on 1st of July this year, having been talked about for several years prior to that. The rules aren’t having any real effect right now, because the banks’ internal servicing test interest rates are doing the job of naturally limiting mortgage amounts anyway.
But as interest rates decline, could DTIs threaten to ‘shut out’ vast swathes of would-be first home buyers (FHBs) and budding landlords in 2025 and beyond? In simple terms, it is unlikely.
DTIs unlikely to ‘shut out’ buyers for now
First, let’s be clear about the rules: 20% of lending to owner-occupiers who are buying existing properties can be done at a DTI >6 and to investors at a DTI>7, with new builds exempt (just like they are for the loan to value/LVR ratio rules too). ‘Debt’ is wide-ranging, including mortgages and student loans for example, while income is broad-based too, e.g. including the extra rent that an investor would collect from another property purchase. In practice, given that the banks will probably prefer to keep a safety buffer, the effective speed limit could actually be closer to 15%; but that’s still reasonably generous (and can be tweaked through time too; as could the 6 or 7 cap).
Indeed, the latest Reserve Bank figures show that less than 5% of all loans are currently being done at high DTIs, specifically 2% in September for first home buyers and 3% for investors. Even compared to the (lower) practical cap of 15%, the latest actual results are no concern – held down by those still-elevated test rates being applied by the banks. At the same time, there’s also a sense that some borrowers don’t want mega loans anyway (due to job concerns for example) or actually need them either, given that national property values are still 18% below their post-COVID peak.
To be fair, in expensive markets (with high ratios of median house prices to median income) such as Queenstown, Tauranga, Nelson, or Auckland, there’s a case for thinking that some would-be buyers could indeed be impacted by the DTIs. But I’d be wary of taking that argument too far. After all, successful buyers tend to earn more than the median income, and in the case of FHBs (and even investors) can often buy a property cheaper than the median price too. Indeed, that willingness to compromise and to ‘find a way’ is a key reason why FHBs are currently running at record-high market shares around many parts of the country.
Understandably, that’s not much consolation for aspiring buyers who don’t earn a high income. But also keep in mind that, much like the 20% allowance for low deposit lending under the LVR rules is reserved for first home buyers, it’s entirely possible that the DTI speed limit would also be kept by the banks for borrowers – either FHBs or investors (or anybody else for that matter) – in those expensive areas; thereby allowing them to keep buying even if their income is a bit lower. By contrast, in cheaper area such as Ruapehu or Grey, the need for high DTI loans is much less acute. On top of that, new-builds would be a clear option for many borrowers too.
A genuine shift in NZ’s lending landscape
None of this is to say that DTIs will never matter and that we should all just ignore them. In fact, they do mark a genuine significant shift in NZ’s lending landscape, by tying house prices more closely to incomes over the long term (but not preventing phases of faster growth altogether) and slowing down the rate that investors can build a portfolio of properties. As part of that, some buyers may well find that their ability to purchase a property is reduced or delayed.
But in that also lie a couple of really important points. First, the DTIs are actually about promoting financial stability (rather than targeting house prices per se), and that benefits everybody.
Second, to the extent that DTIs do in fact dampen the housing cycle, they’ll help affordability to stay in a more comfortable range over the long term, thereby actually helping would-be buyers (although ultimately a key factor here is still trying to keep physical housing supply growth ahead of demand).
All in all, although DTIs aren’t binding yet, they may well become a much greater consideration for banks and borrowers by the middle of next year. It’s possible some would-be buyers will struggle to get a loan as a result, but housing affordability is likely to be kept more in check over the long term. It’s hard to see that as a disaster.
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Meet Kelvin Davidson
Chief Economist
Kelvin joined CoreLogic in March 2018 as Senior Research Analyst, before moving into his current role of Chief Economist. He brings with him a wealth of experience, having spent 15 years working largely in private sector economic consultancies in both New Zealand and the UK.