Auckland’s house price to income ratio is sitting at about 9.6, which is one of the highest in the world, according to New Zealand’s Reserve Bank (RBNZ).
Ideally, that ratio should be significantly lower.
The increasingly stretched ratio between house prices and incomes for new mortgage borrowers in New Zealand, but particularly in Auckland, has long been a matter of concern for many.
Notably, that includes the RBNZ and the IMF – who both think a DTI tool needs to be introduced into the RBNZ’s macro-prudential toolkit.
Now, in its latest Financial Stability Review, the RBA has raised its concerns over the risks posed to its system by New Zealand house prices and household debt.
The RBA estimates that New Zealand housing prices now average about 6½ times annual average household disposable income.
This is very high by international standards, with Australia’s internationally comparable ratio currently around five.
The RBA said this has resulted in a situation where high DTIs have increased, to be around one-third, and investors account for nearly half of such loans.
“More broadly, the investor share of all new loans has been high,” it said.
“This presents additional risks, because high DTI borrowers are less resilient to income or interest rate shocks, and investors may be more likely to sell in a downturn, which could exacerbate price falls.”
Given all four of New Zealand’s biggest banks are owned by Australian banks, the RBA views this as a potential problem for Australia.
The RBA then went on to add its backing to the RBNZ’s call for restrictions on high DTI lending to be added to the existing set of macro-prudential tools available to them.
“This could be used to contain a further build-up in housing risks.”
While the backing of both the RBA and the IMF adds weight to the RBNZ’s crusade for a DTI tool, the government appears to have put the issue on the backburner.
A planned meeting on DTIs with then Finance Minister Bill English was postponed after English ascended to the role of prime minister following John Key’s resignation.
In February, Finance Minister Stephen Joyce told the RBNZ to conduct a full cost-benefit analysis, along with a public consultation, on DTIs before any decision is made on their use.
This means that any binding decision on the introduction of DTIs is highly unlikely before the election in September.
However, commentators have long said they wouldn’t expect DTIs to be introduced this year anyway.
Further, RBNZ governor Graeme Wheeler has said that even if the RBNZ did have DTI ratios at its disposal, it wouldn’t introduce them at this time.
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Addressing housing market risks
