RBNZ says debt limit of five times income would cut risk of housing crash

The RBNZ found that limiting lending at a debt-to-income ratio of five times could be appropriate if house prices rise sharply. Picture / Doug Sherring

More than 10,000 house hunters could have their hopes of getting a mortgage dashed if the Reserve Bank were to deploy the debt to income restrictions it is currently seeking to add to its regulatory powers.

In a consultation document released today the RBNZ suggests that limiting lending at a debt ratio of five times income could be appropriate if house prices rise sharply.

Reserve Bank Governor Graeme Wheeler has stressed that the regulations would not be deployed in the current market conditions but would like to see them added to the tool box to deal with any further acceleration.

House price growth in Auckland and some other regions has cooled significantly in the past six months.

The RBNZ ascribes some of the slowdown to its loan-to-value ratio restrictions which have limited bank lending based on the value of a property.

However housing debt remains one of the three key risks to the financial system as highlighted in last week's Reserve Bank Financial Stability Report.

The bank estimates of 78,200 mortgages issued for housing each year some 10,400 would be blocked by restriction set a debt limit at five times income.

Of that number just 1600 would be first-home buyers, 700 other owner-occupiers, and would be 8800 investors.

The bank's research found that investors typically had higher debt to income ratios than other buyers.

Banks could not make more than 20 per cent of their loans to high debt-to-income borrowers.

The RBNZ data showed about 27 per cent of lending is at a debt-to-income ratio of six times or more, and a further 13 per cent is at a ratio of between five-and-six times, meaning the restriction could "significantly reduce" the amount of lending at a high ratio.

Its models suggested the restrictions would significantly reduce the risk of a housing crisis and lower the threat of a financial crisis.

The bank acknowledged the downsides of introducing the restrictions including the effect on first-home buyers which would be significant for those affected.

For that reason it would "explore the possibility of exemption for owner-occupiers who wished to purchase and occupy a single relatively low-priced home."

"While the policy would stop some potential buyers from purchasing homes, the policy offers a variety of options for affected borrowers (such as searching for a speed limit loan, bringing down planned debt to income, buying a cheaper home, or using the construction exemption)."

Submissions are due by August 18, and if the Reserve Bank does add DTIs to its policy tool kit, it said it would consult with the public again before introducing the measure.

Property Institute of New Zealand Chief Executive, Ashley Church, repeated an earlier warning that the introduction of 'debt-to-income' limits on mortgage lending would have the potential to do significant damage to the Auckland housing market, and the wider New Zealand economy.

Finance Minister Steven Joyce said the use of debt-to-income ratios would be a "significant intervention" and that because the central bank wouldn't plan to introduce them immediately there was "time to consider their possible future use carefully".

- Additional reporting Business Desk