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Explainer – The Reserve Bank has announced it will introduce debt-to-income ratios and tweak the loan-to-value restrictions that apply to home loans, from the start of July.
But what does that mean, and is it going to make it easier or harder to buy a house?
Experts say it will be a big shift – particularly for investors – but the full effects won’t be seen immediately.
What’s changing?
The Reserve Bank says that from 1 July, banks will only be able to lend about 20 percent of their new lending to owner-occupier borrowers with a debt-to-income ratio of more than six. That means, if your household earns a combined $100,000, your loan will be limited to $600,000.
Banks will only be able to lend 20 percent of lending to investors with a DTI of more than seven.
The rules won’t apply to Kainga Ora loans, new builds or refinances.
At the same time, the bank will loosen the loan-to-value ratio (LVR) restrictions so that banks can lend 20 percent of their lending to owner-occupiers with deposits of less than 20 percent, from 15 percent at the moment, and 5 percent of lending can be done to property investors with equity or deposits of less than 30 percent, compared to 35 percent at present,
Why?
The Reserve Bank says the rules are designed to make sure the banks do not take on too much risky lending during “booms”. If people borrow loans that are large compared to their incomes, it becomes harder for them to service when times are tough.
How much difference will it make for buyers?
At the moment, not a lot. There is not much lending being done at high DTIs at the moment, probably because high interest rates make it unaffordable.
The rules are expected to be more of a handbrake when interest rates are low and things are a bit frothy.
CoreLogic chief property economist Kelvin Davidson said they could be significant in future.
Kelvin Davidson
Photo: SUPPLIED
He said people were probably downplaying the impact of DTI ratios, particularly on investors, because they would not have a big immediate impact.
“They are a big deal. In the longer term mortgage rates will come down again and that’s when DTIs will kick in.”
He said it would probably slow the rate at which property investors could accumulate more properties.
“Previously, under LVRs, if the market went up, there’s your next deposit. This is quite removed from that. It’s all about income and you can’t change that straight away.”
The rent that would come from a rental property would often not be enough of an income boost.
Davidson said earlier Reserve Bank modelling showed, with DTIs, it could take six or seven years for a property investor to build up equity from one purchase to buy another. He said that probably compared to two or three years at the moment.
“That’s the big shift that’s been under-reported or underappreciated. It’s a pretty big change but it will only become visible over the longer term.”
Property investment coach Michael Burge said he did not expect a DTI of seven to have too much impact.
“If they want to slow investors down, then they will just lower that DTI,” he said. “But the economy is stuffed and house prices are flat at best, and dropping in some areas still, so I don’t see the need for them to make it harder on investors.”
The Reserve Bank noted first-home buyers and those on lower incomes were expected to be mostly unaffected by the introduction of DTIs because they already faced other serviceability criteria.
As for the LVR changes, CoreLogic data shows owner-occupiers are already borrowing below the current limits.
Only 9 percent of new lending to owner-occupiers was to people with a deposit of less than 20 percent in April.
About 80 percent was to first-home buyers.
But Davidson said the change could provide a bigger benefit to investors, who currently have virtually no options for a loan if they have less than 35 percent deposit.
“Say you’ve got a 33 percent deposit, right now you can’t buy but in a month’s time you can, provided you meet the other serviceability testing… it might boost demand a little bit but I’m not expecting a massive boost because you’ve still got to service the higher mortgage rates and as an investor your rental yields are still low.”
What does it mean for house prices?
File pic
Photo: RNZ / Maree Mahony
The Reserve Bank said it would help ensure house prices remained at sustainable levels because growth in home loans would have to be more closely linked to income growth.
Davidson agreed it would probably mean that house price growth was slower. “We have seen 6 percent or 7 percent on average for a long time but it could be more like 4 percent because income growth is lower and this makes that linkage more clearly.
“I don’t think it suddenly restores housing affordability overnight but over time, if it can restrict house price growth to a lower pace it does prevent affordability getting even worse. If there are fewer investors in the market there’s more opportunity for other buyer groups – that’s a pretty big shift.”
Westpac economists said it could push investors to regions with lower house prices.
“Lower prices compared to incomes will make it easier to jump the DTI hurdle. Very highly priced regions – for example, the Queenstown Lakes region – would be correspondingly disincentivised for both first-home buyers and investors.
“Over time, this may influence investment flows and regional house price trends.”
Westpac still expected a price rise of 6 percent over 2024 and another 7 percent in 2025, alongside wage growth of 2 percent and 3 percent, respectively.
BNZ chief economist Mike Jones said he expected that the impact of DTIs would be seen on house prices in 2025.
“It’s one factor that could slow down any house price appreciation we do see next year as interest rates start to come down because you’re looking at a much harder limit than we see in the likes of LVRs.”
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