Property Institute of New Zealand chief executive, Ashley Church, has warned that ‘significant damage’ could be done to the Auckland housing market and wider economy if the Government allows the Reserve Bank to add debt-to-income limits to its tool-kit.
Finance minister Bill English has indicated that the Government would not grant DTI limits lightly as they represented a ‘significant policy change which has never been tested in New Zealand’.
Referring to a similar policy introduced in the United Kingdom in mid-2014, Church said if the British rules which restrict buyers to a mortgage no greater than 4.5 times their income were enforced here, it would limit a typical Auckland family to a mortgage of less than $400,000.
“The Brits wisely chose to use this tool as a way to protect those who were at most risk of a market crash rather than as a blunt tool to curb house price inflation. But our Reserve Bank already has that ability, in the form of the LVR restrictions – so you’d have to question why they would want this tool unless they want to kill the market – something they’ve repeatedly tried, and failed, to do.”
Church has repeated his warning, made earlier this year, that such a policy would have ‘serious and unintended consequences’ for the Auckland property market and would ‘almost certainly make the Auckland Housing crisis even worse’.
“These things often sound like good ideas until you start thinking through what would happen if they were actually implemented.”
Church said that the probable consequences of such a policy would be disastrous.
“The number of new homes being built – the very thing that Auckland needs most – would plunge as the number of people earning enough to buy them would dwindle to a trickle. So the policy could very well kill off the one thing that can fix the Auckland housing crisis – the construction of new homes.”
The policy would also lead to a dramatic increase in rents over a relatively short space of time, he said, as property investors looked for ways to increase income so as to be able to buy more property.
“Most Landlords are currently showing restraint and choosing to accept lower returns because capital growth is strong. But in an environment where every extra dollar enhances borrowing power – Landlords will want to maximum rentals – and they’ll be able to do it because the Reserve Bank policy will exacerbate the current housing shortage”.
Church believes the current ‘slow down’ in house price inflation is temporary and that prices, in Auckland, will take off again in the New Year.
“The fundamentals which are driving house price growth haven’t changed – and you won’t see an end to this thing until they’re addressed. ‘Artificial solutions’ – such as debt-to-income’ clampdowns will only slow down the speed at which the problem is solved.”