RBNZ eyes DTI, serviceability limits

The Reserve Bank of New Zealand (RBNZ), or Te Pūtea Matua, has opened a public consultation on the merits and design features on its debt serviceability restrictions (DSRs).

The macroprudential tools it is seeking feedback on are two types of DSRs: restrictions on debt-to-income (DTI) ratios (a cap on debt as a multiple of income), and a floor on the test interest rates used by banks in their serviceability assessments.

They would follow RBNZ’s already deployed loan-to-value ratio (LVR) restrictions, which limit the amount of loans banks can issue with an LVR above 80 per cent to a tenth of all new mortgages across both owner-occupiers and investors.

Deputy governor Geoff Bascand commented the bank is not yet proposing to implement the DTI or serviceability restrictions, but it wants to “prepare for implementing them in case financial stability risks warrant it”.

“Although the financial system remains strong and banks are well-capitalised, we are concerned that the combination of very high debt levels and unsustainable house prices poses financial stability risks, particularly if current high-risk lending flows remain unchecked,” Mr Bascand said.

“Adding more options to our macroprudential toolkit will help us to address these risks if needed.”

RBNZ has reported its initial assessment indicated DTI restrictions are likely to be more effective than test rate floors in supporting financial stability and in combating the house price surge.

“DTI limits link credit availability to income growth and can therefore be more effective in constraining debt levels over a longer period compared to other macroprudential tools,” the Reserve Bank stated.

It also noted that DTI restrictions could be calibrated to minimise impacts on first home buyers, which would align with a formal direction New Zealand’s Minister of Finance gave to the Reserve Bank.

But, DTI restrictions would be likely to take six to nine months to implement, while interest rate floors could be rolled out faster – making them a potentially useful interim measure.

Interested parties have been invited to give feedback until 28 February.

In Australia, APRA has laid out the potential lending curbs it could implement in an information paper, to follow its raised minimum serviceability buffer for mortgages.

The watchdog flagged that its toolkit included DTI and LVR limits, among other portfolio restrictions.

In October, the regulator raised the minimum buffer rate banks would need to assess borrowers’ serviceability to 3 percentage points above the product rate – compared to the previous 2.5 percentage points.

[Related: Housing affordability down 15.6%: Bluestone]