restrictions on the cards next year

Debt-to-income levels will become reality for mortgage borrowers next March, says Kelvin Davidson, CoreLogic’s chief economist.

Although the Reserve Bank (RBNZ) hasn’t said it will introduce DTIs, it has indicated March next year is the date they will become a formal tool, along with LVRs, to restrict residential mortgage lending.

Davidson says the RBNZ will activate DTIs next year – not to curb lending in this housing cycle, but for subsequent cycles, so house prices never rise 40% over two years as they did during the Covid pandemic.

He says the RBNZ’s recent release about debt-to-income ratios didn’t say anything new.

“There was no indication of the limit, whether it would be five, six or seven times income, exemptions for new builds, although it has to be assumed there will be, or speed limits.”

The release was to keep DTI restrictions in front of people, to remind them the RBNZ was still looking at it and could introduce it.

It won’t be an issue for mortgage holders and new borrowers even if they are activated in March, because risky lending has been reined in, he says.

“The system is not that stretched.”

Davidson says if DTIs are put in place it is likely they will not bind in this cycle.

“Recently interest rates have risen at such a rate, so borrowers can’t service as much mortgage debt, and house prices have come down, so they haven’t had to borrow as much,” says Davidson.

“That’s why DTIs activated next year might not bind, because things have tightened up.”

He says introducing them is about keeping a lid on future property cycles, tying house prices to income and trying to limit house-price growth to 10% or less year-on-year.

“While it will not restrict growth immediately, it will in the long run. We won’t see outright house-price falls, but they won’t rise as quickly in future.”

Davidson says it’s anybody’s guess when the nitty-gritty of DTIs – the borrowing level against income – is laid out by the RBNZ.

“It could be in the bank’s six-monthly Financial Stability Reports, usually released about May and November, or it could sneakily announce it at any time, as it did with LVRs.”