IMF backs move for Reserve Bank debt-to-income tool

by NZ Adviser08 Mar 2017
The International Monetary Fund (IMF) has indicated its support of the Reserve Bank gaining the power to impose debt-to-income (DTI) ratios on mortgage lending, after its recent mission to New Zealand. 

"With high household debt, you worry about the amplification of large external shocks," mission chief Thomas Helbling said, according to a Fairfax article. 
The Reserve Bank’s macroprudential toolkit needs broadening, IMF staff said in a Concluding Statement describing their preliminary findings after the visit.  

“Exposure limits to high loan-to-value ratios (LVRs) have reduced the potential losses on bank balance sheets if a household defaults. But they do not protect banks against an increase in the number of households defaulting, the probability of which has increased with the rising debt-to-income (DTI) ratios on new loans,” the report stated. 

“To strengthen household balance sheet resilience and reduce the probability of household defaults under downside shocks, the macroprudential toolkit should be extended to include a DTI or (stressed) DSTI instrument, in line with recommendations by the FSAP. 

“These directly target the most acute household vulnerability. Other macroprudential instruments available to the RBNZ are approaching their practical limit (LVRs) or address the problem indirectly, with limited effectiveness and higher risks of unintended consequences. The new instrument should be activated in the event that effects of the most recent macroprudential package on credit growth prove to be temporary. “

Spurred by the demand-supply imbalance, particularly in Auckland, it stated housing-related macro-financial vulnerabilities are expected to rise in the near term.

“The resolution of demand-supply imbalances will take time, and vulnerabilities should be contained with macroprudential policies in the meantime.

"Tighter macroprudential policies, higher interest rates, moderating net migration, and easing housing supply constraints should result in lower house price increases.”

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