Banks say Reserve Bank has missed its chance for debt-to-income rules

If the Reserve Bank was granted its wish for debt-to-income rules, there could be unintended consequences, bank bosses said.
JOHN HAWKINS/FAIRFAX NZ

If the Reserve Bank was granted its wish for debt-to-income rules, there could be unintended consequences, bank bosses said.

Regulators have missed the boat if they want to introduce debt-to-income (DTI) restrictions on home loans, bank bosses say.

Reserve Bank governor Graeme Wheeler said in November that his bank had asked then-Finance Minister Bill English to approve DTIs as another tool that could be used "if housing market imbalances were to deteriorate further".

The restrictions are deployed in other markets around the world, such as Britain, where borrowers must have a loan no bigger than 4.5 times their income.

But KPMG has released its latest Financial Institutions Performance Survey, which said bank executives unanimously agreed it was now too late to consider DTIs.

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They said banks were already lending at ratios that were far above what would be considered ideal.

The bank bosses suggested an ideal level of borrowing would be five to seven times borrowers' incomes. But their own banks had already blown that out of the water - they said most borrowers were taking loans nine to 12 times their incomes.

There are concerns that there could be unintended consequences as a result of DTIs. It has been predicted that they could cause a "market meltdown" in areas such as Auckland.

The KPMG survey suggests they would be hardest on those struggling to get into a first home.

The bank executives told the survey they had sympathy with young families who would be prevented from owning a house by DTIs.

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This could be an unintended social consequence that the executives feel that the effect might not have been adequately researched," the report said.

The report said the bank bosses said such a rule would require a clear, fair and explicit definition of what constitutes income and waht constitutes debt.

The Reserve Bank wants a debt-to-income tool to help reduce the scale of mortgage defaults in the event of a downturn.

The report noted that the banks were increasingly cautious about the property market. During 2016, the banks all voluntarily adopted the Reserve Bank's new 60 per cent loan-to-value limit for investors earlier than they had to, and a number stopped including foreign income int heir affordability calculations.

In 2015, the Reserve Bank said about 40 per cent of New Zealand mortgages were issued at more than five times the borrower's gross income.

This month Finance Minister Steven Joyce said he wanted a full cost-benefit analysis of the proposal and was cautious about giving the Reserve Bank more tools to address the risks it identified in the financial system.

 - Stuff

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