- Date published:
7:56 am, June 15th, 2017 - 116 comments
Categories: debt / deficit, Economy, grant robertson, greens, labour, Metiria Turei, national, same old national, treasury - Tags:
Has anyone noticed that it’s now much harder to sell a house? I sure ain’t giving advice. But I suspect existing home owners are finding it takes longer, and no-one’s still getting the great life-altering profit they thought they would from selling.
Back in October last year, the Reserve Bank issued a formal request to government to introduce debt to income (DTI) ratios on home loans.
Debt to income ratios would limit most borrowers to about five times their gross income. If your household is earning $100,000 gross per year, you can loan up to $500,000. That’s it. You can figure out what that would mean for first home buyers across New Zealand, and particularly anyone who lives in a city north of Dunedin.
The Reserve Bank has already implemented Loan to Value restrictions. As noted by Green Party Co-Leader Metiria Turei in May 2016: “The Reserve Bank told the Government that an Auckland family earning $100,000 a year is potentially going to have to spend 60 to 70 percent of their income servicing the mortgage on their first home in the next year or two.” That’s a lot of the groceries gone.
But Debt to Income (DTI) ratios are an even blunter tool. Labour Finance Spokesperson Grant Robertson said at the time that they would only support the rules if they came with a distinction between first time buyers and investors, as well as a regional variation. “While we’ve all got concerns about the growth in speculators and investors, first time buyers will be hit by them [DTI’s]”, he said.
That was last year. So in a barely-noticed media release from Minister of Finance Stephen Joyce on June 9th this year, he welcomed the Reserve Bank consultation document on DTI’s.
The consultation document is here. Consultation closes on August 18th.
The test is this: all those people out there desperately mortgaging themselves up to the gills may still have the “Kiwi Dream” in their eyes when they sign up to that mortgage – literally a “pledge to the death” – but are they actually too much of a risk to the whole banking system and to us all?
While there’s a full review of the Reserve Bank macro prudential settings due next year, this DTI proposal needs to be considered fast. The fast-deflating housing market in Auckland should make everyone’s hairs stand on end. Because mortgage debt is where New Zealand’s greatest economic threat is.
In June 2016 the HSBC Chief Economist for Australia and New Zealand emphasised that distribution and serviceability was more important than the size of our national debt: “Is the household debt held by households that will be able to service it?”
He had published a paper in April 2016 finding that even though Australia had one of the highest debt levels, most of it was held by its highest earners. He also reminded that the number who could not afford to service debt in the U.S.A. in 2006-7’s GFC were the big tipping point. If banks were unable to give loans to such people due to stricter DTI’s, a little less damage might have been done.
The TOP party spokesperson Geoff Simmons says that the DTI proposal would shut about 2,000 first home buyers and 9,000 investors out of the market. That’s a whole bunch of no-one buying houses anymore. The change hits investors more than individual home owners, which is good. Doesn’t alter the huge tax advantage to investing in housing more than anything else (which TOP plans to eradicate), but it would still be a massive crack of a very brittle wall holding back a dark ocean of mortgage payments pouring onto tens of thousands of New Zealand families.
All those New Zealand landlords who thought that all they needed to do was just get the rent to pay the interest off because they would get their profit from a rise in value and just sell it in two years – that whole financial scenario is under threat.
All those home owners who thought they could stretch upwards and get a nicer house and take their payments well beyond 70% – just wait by the phone for a call from the bank.
The Reserve Banks’ Reasoning is here.
Now listen to this closely from the Reserve Bank:
A DTI limit would reduce credit growth during the upswing and reduce the risk of a significant rise in mortgage defaults during a subsequent severe economic downturn.”
DTI’s are coming, and the New Zealand Reserve Bank is already preparing us all for the next big crash.