January 2017 Newsletter
Warning against “Debt to Income” mortgage lending limits …
Property Institute of New Zealand Chief Executive, Ashley Church, has issued a warning about the possible consequences ‘debt-to-income’ limits on mortgage lending. If introduced (the DTI limits), the Reserve Bank would have the power to restrict what New Zealanders could borrow for a mortgage relative to their income. The Reserve Bank has asked for such powers but indicated that the Government would not grant them lightly as they represented a ‘significant policy change which has never been tested in New Zealand’.
Risk of Higher Rents
Mr Church says the policy would also lead to a dramatic increase in rents over a relatively short space of time as property investors looked for ways to increase income so as to be able to buy more property. “Most Landlords are currently showing restraint and choosing to accept lower returns because capital growth is strong. But in an environment where every extra dollar enhances borrowing power – Landlords will want to maximum rentals – and they’ll be able to do it because the Reserve Bank policy will exacerbate the current housing shortage”. Mr Church says that the proposed policy could also:
• Create a further barrier to young people looking to buy their first home – a prospect already made almost impossible by the Reserve Bank clampdown on loan-to-value lending.
• Restrict, or eliminate, the ability of small business owners to use the equity in their home as security for cash-flow – potentially putting thousands of small businesses at risk.
“There’s a strong case to be made that the introduction of stricter ‘Loan to Value’ rules has already compounded the issue and dragged out the speed at which the market corrects itself”.
“We understand the Reserve Bank want to protect the economy against the risk of financial shock – but doing anything which reduces the construction of new dwellings is a hollow solution because it will only delay an even bigger problem down the track”.
“The fundamentals which are driving house price growth haven’t changed – and you won’t see an end to this thing until they’re addressed. ‘Artificial solutions’ – such as debt-to-income’ clampdowns will only slow down the speed at which the problem is solved”. Mr Church says history shows us that, left to run their course, property booms eventually peter out once the underlying issue – lack of supply – is resolved. www.property.org.nz