DTIs mean Lower Home Ownership rates.
You may have heard that the Reserve Bank of New Zealand is considering the introduction of debt to income ratios (DTIs). What does that mean for us?
More people will end up renting.
DTIs have already been introduced in other countries, they make it tougher for people with lower incomes to get into the property market.
Supposedly the goal of DTIs is to prevent investors from competing with home buyers and to stop people from taking on too much debt.
What really happens is, large property investors and the wealthy continue to buy property while people on lower incomes get shut out of the market. Unintended consequences.
See full article from Stuff below:
By Miriam Bell
New debt-to-income ratio (DTI) rules on mortgage lending could be in place by April, and they will hinder the ability of many investors to buy multiple properties, experts say.
The rules, which limit how much people can borrow to a certain multiple of their annual income, have been years in the making.
In 2021, Finance Minister Grant Robertson agreed DTIs could be introduced, but only after public consultation, and last year the Reserve Bank announced it would be going ahead with them.
Mortgage Supply Company director David Windler said banks had until April next year to put a DTI system in place.
That was not to say that DTIs would be imposed then, but it meant the Reserve Bank would have the ability to impose them if, and when, it wanted, he said.
“I don’t see why they would use them as a tool now because the market has slowed and is quieter, but they are there to moderate the market in future.
“They give the Reserve Bank the ability to stop the sort of runaway house price growth that was seen in 2020 and 2021, and they will help to level out the market cycle more.”
It was not yet known what ratio the Reserve Bank would impose, nor whether there would be a “speed limit”, where banks could do a certain amount of high-DTI lending.
But when introduced, DTIs would have an impact on borrowers proportional to the amount of debt they had, he said.
“Investors tend to carry higher levels of debt than owner-occupiers do, so DTIs will dent their ability to take on more, and curb their enthusiasm about doing so.”
CoreLogic chief property economist Kelvin Davidson said that despite uncertainty over the details, DTIs were coming, and would be a game changer for investors in the long term.
DTI lending had fallen sharply over the last 12 to 18 months, as house prices had gone down, incomes had gone up, risk tolerance reduced, and mortgage rates increased, he said.
“In 2021, 35% to 40% of investor lending was done at a DTI of above seven, and that same figure had dropped to around 11% by the end of last year.
“So the rules are more about restraining the ‘next cycle’ for prices and improving long-run financial stability, but investors probably shouldn’t take too much comfort from that.”
The shift in the lending landscape would be a significant change, as it would no longer be possible to borrow against increased equity in existing properties when prices went up, he said.
“Reserve Bank modelling suggests somebody with a large portfolio in the range of seven to 10 properties, and higher existing debt levels, may not be able to secure their next property for a decade after DTIs have been imposed.
“Similarly, somebody with a small portfolio of one to two properties may not be able to add their next one for at least five years. The bottom line is income needs time to grow to service higher debt levels.”
Investors did not seem to be too concerned about DTIs yet, and that could be because they affected future buying more than current ownership, Davidson said.
“But DTIs also point to a lower assumption about the future long-term price growth rate and capital gains as price growth will be more closely tied to income growth, which tends to average 3% to 4% per year.”
Economist Ed McKnight, from property investment company Opes Partners, said a key question was the ratio the Reserve Bank chose to impose.
It had been suggested the amount borrowers could spend on a home could be capped at six or seven times their income, but there were no signals from the Reserve Bank as to which it might be, he said.
“While it might be academic at the moment, home buyers need to be aware of the ramifications, particularly if they want to invest in property to build future wealth.”
Generally, DTIs impacted on investors more than owner-occupiers, but if they were imposed they would also hinder first-home buyers who had lower incomes and did not have a big deposit, he said.
“They won’t have the same levels of uncommitted income, and just don’t have the space to move that banks want to see, so they won’t approve loans in those cases.”
But new builds, construction loans, and the remediation of existing properties were likely to be exempt from DTIs, McKnight said.
That meant new builds offered opportunities, especially as they came with other incentives, such as lower deposit requirements, and exemptions from the new interest deductibility rules.
Unlike registered banks, non-bank lenders would not be required to impose DTIs, he said. “Once interest rates get lower they could become very competitive in this space.”
Mortgages Online director Hamish Patel said buying a sub-divisible section was a strategy that could be employed by people wanting to own more than one property at a time.
If construction loans were exempt, having a section large enough to build one or more additional homes on would allow people to increase their portfolio without being subject to DTIs, he said.
“Buying as a group, particularly a family group, is getting more common, and it is one way a low-income first home buyer could secure a property with DTIs in place.
“But people buying in that situation will have to carefully consider any future borrowing they might want to do with someone else, and how their debt might impact on that.”
Self-employed people buying with projected income calculations might also find it a bit more challenging to get a loan under a DTI system, he said.
