Economists warn on impact of DTI and LVR on housing crisis

by Roxanne Libatique15 Dec 2020

Kiwibank economists have warned about the impacts of the Reserve Bank of New Zealand (RBNZ)’s plans to introduce debt-to-income ratios (DTIs) and reinstate loan-to-value ratio (LVR) restrictions, emphasising that the plans focus too much on demand rather than supply.

Kiwibank economists, led by chief economist Jarrod Kerr, said in their latest report that demand “may be about to top out” in the housing market as the LVR restrictions return in March 2021. In fact, banks have already started to reintroduce pre-COVID-19 LVR restrictions ahead of the RBNZ’s plans. Meanwhile, RBNZ governor Adrian Orr asked the finance minister for permission to use DTIs.

Kiwibank economists said the plans focus too much on demand, but the housing crisis is a supply issue.

“Unfortunately, much of the debate focuses on the demand for housing. LVRs and DTIs look to restrain demand at least in the near term, whereas the main problem is supply. House prices are surging on a lack of listings. Land values are skyrocketing as land remains locked. Decades of underinvestment in key infrastructure to unlock land for residential use is the issue. We have plenty of land, just not zoned for use. Add to that the ridiculous cost to build and the inhibitive consent processes. If affordability is to be addressed, increase supply,” said Kiwibank economists, as reported by Good Returns.

They added that DTIs present several issues, emphasising that the rules would “adversely impact first-home buyers” because they limit how much debt a buyer can take on relative to their income. They also believe that there is “no one size fits all” for DTIs as some areas, such as Auckland and Wellington, have significantly higher prices and larger mortgages than smaller towns and cities.

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