DTI limits likely but very unfair
OPINION: Trapped by their times into monster mortgages, first time homebuyers have loans that are often six- or seven-times their total incomes.
The Reserve Bank sees these as high risk loans, and will consult soon on limiting the amount of high debt to income (DTI) loans banks can make.
Back in 2017, the Reserve Bank had a bash at getting DTIs brought in, and talked about a
DTI limit of five times ($500,000 on an income of $100,000 for example).
Four years later, with house prices having risen massively, that red line over which it was dangerous to step, is now stepped over by the majority of first-home buyers.
The Reserve Bank’s own data shows of the $1.66 billion of new loans to first-home buyers in
June, $953 million was at DTIs of five or over.
In other words a DTI limit of five now (note that Ireland’s DTI is 3.5) would ban a good portion of those with deposits from buying homes.
I’m curious to see what DTI number the Reserve Bank (which claims it has had ony a ‘‘bit role’’ in the housing crisis) uses in its consultation later this month.
A straw poll I took of economists reckons probably six, while one felt we might see a higher DTI limit for people buying new homes in a bid not to bring home building to a grinding halt.
Anything lower than a DTI limit of six would ban so many people from buying; it would risk crashing the housing market.
The Government, increasingly wary of sentiment change over its handling of the Covid-19 crisis (how many new intensive care beds has Auckland got in the last 18 months?), has made it clear it does not want a DTI limit to get in the way of first-home buyers.
We will probably get DTI limits, despite them being profoundly unfair.
They tell the young: To protect financial stability, and the rest of our wealth, you can’t buy one of those ridiculously expensive houses. They are a spit in the eye of someone who has already been slapped.
As we ponder DTI limits, Ireland’s central bank, led by former Treasury boss Gabriel Makhlouf, is pondering its own DTI limits, after criticism they were locking young Irish people into lifetime renting.
In a recent blog, Makhlouf noted DTIs are used by 14 per cent of central banks globally.
What should the young, and those who love and care for them, think? It’s important not to give in to a sense of doom, or to be silent when the Reserve Bank puts out its consultation paper.
Young people must keep doing the things that got their parents into homes (career, save, invest, stay at home longer, etc), including only voting for political parties truly willing to help them.
The deal between Labour and National to increase building in our cities can be read as a sign of hope, or a desire to neutralise a failure both are guilty of.
High debts compared to incomes are dangerous.
An income drop, a job loss, rapid rises in interest rates, all threaten people’s ability to repay. This is one of the unfairnesses of failing to build enough truly affordable homes.
I’ve lived long enough now to know every working lifetime will contain multiple economic and financial crises.
But even as loans have grown, we hear little to nothing of recent home-buyers losing their homes.
Low unemployment, the support of parents (‘‘No son/ daughter of mine loses a home’’), and the ability of the young to make rapid changes to their way of living (second jobs, moving in with the folks and renting their places out, renting out the spare room, etc) are probably reasons.
People will cut spending to the bone before missing a home loan payment. However, banks avoid mortgagee sales. Struggling borrowers sell up quietly. It’s all very hush, hush. Shame means people don’t advertise their financial failures.
Who knows how much is really happening? I hope very little.
Fortunately, we do now have some hope that the two leading parties no longer hold young people’s housing dreams in contempt.
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