Key Facts

  • The Reserve Bank of New Zealand (RBNZ) is considering the implementation of Debt-to-Income ratios (DTIs) to complement its Loan-to-Value Ratio (LVR) tool, which has restricted lending to home buyers and investors with minimal deposits.
  • The possible DTI restrictions do not need government approval but RBNZ has previously sought approval from the Finance Minister before implementing new tools.
  • RBNZ claims that if DTIs had been introduced pre-Covid, fewer borrowers would be struggling now with higher interest rates.
  • DTIs are considered effective in supporting financial stability and sustainable house prices and are less impactful to first-time buyers than investors.
  • A study on macroprudential policies states that LTV restrictions have successfully added to household and lender resilience, but have had a limited and temporary impact on house price inflation.
  • Mortgage lending makes up 60% of banking sector assets and a majority of household debt, which is relatively high compared to other developed economies.

Article Summary

The Reserve Bank of New Zealand (RBNZ) states it could potentially introduce Debt-to-Income ratios (DTIs), which would compliment its existing Loan-to-Value Ratio (LVR) tool. The LVR tool has largely restricted lending to home buyers with a 20% deposit and investors with a 40% deposit. The introduction of DTIs does not require government approval, but the RBNZ usually seeks approval from the Finance Minister when implementing new tools.

According to an RBNZ article, if DTIs had been introduced before the Covid-19 pandemic hit, fewer borrowers would be facing difficulties today due to the higher interest rates. Should DTIs be enforced, banks would need to prepare, with RBNZ already informing them to be ready by April 2024.

A case study for the Bank of International Settlements by the Reserve Bank suggests that DTIs are most effective supporting financial stability and in managing sustainable house prices. They are seen to have a smaller impact on first-time buyers compared to investors. The study also revealed that the Loan-to-Value restrictions have played a successful role in increasing household and lender resilience.

Mortgage lending composes 60% of banking sector assets and the majority of household debt in New Zealand, which is considerably high compared to other developed economies. Prior to the LTV restrictions in 2013, about 20% of banks’ mortgage lending had an LTV ratio above 80% and was increasing, leading to rising vulnerability of the banking sector to housing risks.

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