Finance Minister Bill English has confirmed the government has started discussions on debt-to-income ratios with the Reserve Bank.
Reserve Bank Governor Graeme Wheeler has not made a formal request for the introduction of debt-to-income ratios, English told media.
“But he has told the government he wants to investigate the policy.”
English added that he didn’t want to pre-judge any discussions on the topic with the Reserve Bank.
In order for debt-to-income ratios to be introduced, the government’s Memorandum of Understanding with the Reserve Bank would have to be amended to allow it.
Debt-to-income ratios restrict the amount someone can borrow for a property based on the income they earn.
For example, they are used in the UK where borrowers are restricted to mortgages no higher than 4.5 times their annual income.
The possibility of using of debt-to-income ratios to take the heat out of the housing market was first raised last year.
At the time, the Reserve Bank said it was doing work on what might be possible in the area, but had no concrete plans to introduce debt-to-income ratios.
Last month Wheeler said the introduction of debt-to-income ratios was a possibility, but more analysis was necessary.
Now, it seems analysis of current housing market data has convinced the Reserve Bank the tool could be a good idea.
But, in a recent report on macro-prudential policy options, Westpac chief economist Dominick Stephens said debt-to-income ratios were a policy tool outside the Reserve Bank’s current toolkit.
This means that more work on them has to be done before they can be implemented.
For example, it will be necessary to settle on a standard definition of income, Stephens said.
