The Reserve Bank’s justification of imposing debt-to-income (DTI) limits on housing lending has showed that they are deeply flawed, according to a report from the Tailrisk Economics.
The report said that the DTI is a crude tool that “does not adequately assess borrowers’ debt servicing capacities, and which will perversely target many better quality loans."
“The Reserve Bank has presented no substantive evidence that higher DTI loans are “excessively” risky, or that a DTI ratio of 5 is a sensible cut-off,” Tailrisk Economics principal Ian Harrison said, “but there is significant evidence that DTIs do not predict loan defaults, or reduce the likelihood or severity of crises.”
According to the group, the European Systemic Risk Board, in a recent assessment of GFC performance, found that DTI levels did not have any “relevant effect either on the prediction of the crisis or on the depth of the crisis.”
The economics consultancy went on to say that the application of the DTI limit to investor loans is particularly misconceived, because DTI limits are only intended to apply to owner occupier borrowers.
The DTI measure assumes that when investors purchase new properties their living expenses increase which “simply does not make sense,” said Harrison.
According to the report, no other country has imposed DTI restrictions on investor loans.
“Higher future interest rates do not pose a material systemic risk, providing the conduct of monetary policy is competent,” Harrison said.
“Further, the bank’s assessment that the restrictions would have a net welfare benefit, understates the costs and relies on a number of key assumptions, in particular a 25% chance that there will be a crisis in the next five years, with house prices falling by 40% to 50%. Our assessment is that the restrictions will have a welfare cost, like most misconceived quantitative interventions.”