Wheeler sees role for debt-to-income restrictions that English says would be 'tricky to implement'

Wednesday 30th November 2016

Reserve Bank governor Graeme Wheeler says the central bank would look to introduce debt-to-income (DTI) lending restrictions if it saw house price inflation driven by credit, adding a lever to its macro-prudential toolkit that would hit property investors the hardest.

In the bank's six-monthly financial stability report released this morning, deputy governor Grant Spencer confirmed the bank has requested Finance Minister Bill English approve the addition of a DTI tool to its suite of restrictions on lending to the property market, joining Ireland, the UK, Canada and Hong Kong.

Wheeler told Parliament's finance and expenditure committee that he wouldn't use the tool at this stage because house price inflation has moderated in and outside of Auckland.

"What would concern us is if we saw house price inflation starting to pick up in Auckland and elsewhere, and if it was clear that was credit driven with commitments expanding and continued increases in DTIs. If we started to see those things, that would concern us a great deal. They would be the conditions in which we would consider using the DTIs." Wheeler said.

The governor said the bank had seen an increase in debt to income ratios but since May there had been a "significant falloff" in the value of commitments and so house price inflation had moderated.

"If you look at the commitments that have taken place over the last six months since May, you've seen quite a dramatic fall in the value of those commitments with investors - something in the order of 30 percent, which is large - and something in the order of 8 percent for other borrowers," he said.

The borrowers that have the highest DTI ratios are investors, and high-income borrowers, Wheeler said.

"The proportion of first home borrowers in terms of transaction volumes has been pretty stable since 2014, it's been around 20 percent, but we've found the proportion of high-DTI lending - say over 5 - has been rising with first home borrowers. The DTIs, in particular, tend to be quite high with investors, and they would be the group that would be most affected."

DTI borrowing restriction would probably take a similar form to in the United Kingdom, where there is a ratio requirement of 4.5 with 15 percent of lending able to be done over that ratio, though "that's not to say for one minute we would introduce a 4 and a half level," Wheeler said.

Finance minister Bill English, speaking to media following his appearance at the select committee, said the government had asked the bank for more information as it considers the request, but he understood the measure was "tricky to implement."

"The bank has indicated even if they had them there's a lot of work in getting the implementation right," English said. "I wouldn't want to speculate on how long we'd take but they're tricky to implement, that's the advice we've got. Some of the issues are basic, like what is your measure of income. We've got discussions with banks over the next few weeks."

English said the government agreed with the central bank about the importance of increased housing supply, and he hasn't seen a convincing case for another lever like stamp duty on foreign buyers.

"In the context of supply, all of the demand side controls are likely to have small or transitory effects because those conditions are still there of quite low interest rates, strong population growth, confidence people have in their incomes," English said.

BusinessDesk.co.nz

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