RBNZ considers DTI tool to cool risky borrowing

The Reserve Bank has launched a consultation on setting limits on debt-to-income lending but with a possible exception for some homebuyers

RBNZ considers DTI tool to cool risky borrowing
It was four years ago that RBNZ introduced loan-to-value ratio (LVR) restrictions to its toolbox of macroprudential policy measures, which it says has been highly effective in reducing risk to the financial system from highly-leverage mortgages.

Now it is looking at the other side of home loans, the ability of homeowners to afford repayments, specifically the debt-to-income (DTI) measure, which is says has been increasing over the past 30 years with evidence of further increases since 2014.

In a consultation paper published on Thursday, the bank asks for feedback on the impact that setting limits on the multiples of borrowers’ incomes would have on maintaining financial stability and on the housing market.

The public consultation comes ahead of a full review of the macroprudential framework in 2018.

RBNZ says that introducing DTI limits would help financial stability by reducing household financial stress in adverse economic circumstances, such as a sharp fall in home prices.

It would also reduce exposure to mortgage loans for banks and other lenders in a downturn and limit the credit-asset price cycle in a way that other measures would not.

The consultation paper highlights that the purpose of DTI limits would be to protect the housing and mortgage markets rather than individual borrowers. 

While the bank does not rule out further tightening of other tools, such as LVR, it believes that DTI limits would better focus on the mortgage market.

As a DTI limit would likely reduce the ability of some potential homebuyers, there may be an exemption to the policy for owner occupiers who wish to purchase and occupy a single relatively low-priced home.

There could also be exemptions for buying newly-built homes.

While noting that there could be a drag on the economy by lower house prices and consumption, the Reserve Bank believes that the cost would be outweighed by the benefit of reducing the chance of a housing-related economic crisis.

The consultation is open until 18th August 2017.