New Zealand’s central bank recently implemented new restrictions on housing finance lenders to control the amount of debt relative to borrowers’ incomes. This decision comes amidst concerns about default risks in the country’s volatile housing market.
Starting from July 1, banks are required to adhere to these new rules for new lending on residential properties, applicable to both owner-occupiers and investors. The Reserve Bank of New Zealand (RBNZ) will also ease loan-to-value ratio (LVR) restrictions simultaneously, which limit low-deposit lending by banks.
Rationale Behind the Decision
RBNZ Deputy Governor, Christian Hawkesby, stated that having both debt-to-income (DTI) and LVR restrictions in place allows for a more targeted approach to managing risks in the financial system. This move aims to enhance the overall resilience of the banking sector.
While the implementation of these new rules was anticipated by the market, it is believed to have no direct impact on monetary policy. However, economists at Westpac caution that the regional disparities in house price-to-income ratios could alter investor behavior.
Regional Disparities and Investor Behavior
The significant variations in house prices relative to income across different regions in New Zealand may prompt investors from high-income areas to shift their focus towards regions with lower property prices. As DTIs become binding in regions with high prices, this could lead to a redistribution of investments.
New DTI Settings
Under the new regulations, banks are allowed to allocate up to 20% of their loan portfolios to owner-occupier borrowers with a debt-to-income ratio exceeding 6. This adjustment aims to strike a balance between managing risk and maintaining a stable financial system.