Reserve Bank urges debttoincome limit
WELLINGTON: The Reserve Bank says setting a limit on home mortgages of more than five times income would make an appropriate addition to the macroprudential toolkit it could call on to prevent a housing market crash.
The central bank reached that conclusion after a costbenefit analysis of its options for responding to a housing bubble that could threaten financial stability and has released a consultation paper for feedback. The RBNZ found that limiting lending at a debttoincome ratio of five times could be appropriate if house prices rise sharply. The speed limit would restrict higher DTI loans to 20% of lending, it said.
In the document, the RBNZ said data show about 27% of lending is at a debttoincome ratio of six times or more, and a further 13% at a ratio of between five and six times, meaning the restriction could ‘‘significantly reduce’’ the amount of lending at a high ratio.
The bank’s work estimates of the 78,200 mortgagefunded purchases in a year, 10,400 high DTI transactions would be blocked by a restriction, of which 1600 would be firsthome buyers, 700 other owneroccupiers, and 8800 investors.
The RBNZ would expect the DTI policy would reduce ‘‘highrisk lending quite significantly’’, reducing the risk of a housing crisis to 4% from a baseline of 5% and lowering the threat of a financial crisis to 1% from 1.5%. Even if those crises occurred, the RBNZ said the DTI policy would cut the cost of a housing crisis to 8% from a baseline cost of 10%, and reduce the cost of a combined housing and financial crisis to 16% from 20%.
In total, that would reduce the total net cost to 0.4% of gross domestic product from a cost of 0.65% of GDP without the DTI.
That benefit of 0.25% of GDP outweighs the projected costs associated with the policy. The central bank estimates a 0.1% knock to GDP as lower house prices cut consumer spending and construction activity, and a 0.07% of GDP cost the bank expects would come from potential buyers being blocked from the housing market.
‘‘The Reserve Bank considers that a DTI limit, or other serviceability restriction, would reduce the risk of a severe housing downturn in certain circumstances, and attenuate the impact of any downturn on the wider economy,’’ it said in the paper. ‘‘While the policy would stop some potential buyers from purchasing homes, the policy offers a variety of options for affected borrowers.’’ — BusinessDesk