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Debt to Income Ratio’s

November 17th, 2015.

Keep an eye out over the next 6 months or so in regards to the above. The RBNZ’s main approach since introducing Macropudential policies in 2013 as a means outside of using interest rates to control the property markets has been around equity based or LVR controls.

In the UK in particular they have gone the other way and put regulation in place around servicing. In some ways this makes sense as people are more likely to go broke in regards to lack of cashflow than lack of equity however at the same time if implemented incorrectly this could have some very negative effects not the least making it even harder for first home buyers to get into the market.

The Reserve Bank would need the backing of both Treasury (whom have shown enthusiasm already) and Finance Minister Bill English to be able to introduce this but all parties have been looking closely at countries like England where most home buyers can only borrow 4.5 times their annual income and in Ireland where the loan to income ratio is 3.5 times.

Auckland’s median house price recently hit $771,000 so working off the above rules most families would get locked out of home ownership.

It is probable that there would be exemptions such as new builds and a certain amount which could be lent above the cap and this is what will be important if this regulation is bought in otherwise it could stop the market dead which will only increase the supply side issues we already have.

The 30% deposit introduction in regards to Banks lending to property investors in the Auckland Council region and the changes made by the Government such as the introduction of the brightline test and the requirement for an IRD number and a NZ bank account seem to already have had quite a dramatic effect.

It will take a further 6 months or so to see whether this reduction in activity is here to stay or whether the market will kick back into gear. If it is the latter except to hear a lot more about debt to income restrictions.

If you would like to discuss this further feel free to email me at kris@krispedersen.co.nz and we can advise if there is a better set up for you.

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