Mortgage rules ‘could cause meltdown’
Pundits fear Reserve Bank attempts to cool the property market could make things worse for first-time buyers, writes Susan Edmunds.
There are fears the property market could grind to a halt if debt-to-income ratios are introduced by the Reserve Bank. The restrictions are deployed in other markets around the world, such as Britain, where borrowers must have a loan no bigger than 4.5 times their mortgage.
Reserve Bank governor Graeme Wheeler is believed to have held talks with Finance Minister Bill English about whether similar tools could be deployed here, although he said at this stage the work being done on them was still analytical and it would be some time before they were introduced.
Last year, the Reserve Bank said about 40 per cent of mortgages in New Zealand were issued at more than five times the borrower’s gross income – and as such would not be allowed if we adopted similar rules to Britain’s.
About 60 per cent of all investor lending is at a total debt-to-income ratio of above five, with about 25 per cent at a ratio exceeding seven. First-home buyers were much more likely to have lower multiples, it said.
Banks are willing to go much higher – ANZ’S calculator said a couple with an income of $100,000 and no kids could borrow $678,000. ASB said $624,000 and Bank of New Zealand $628,000 if the loan was over 30 years.
Broker Glen Mcleod said banks needed to be able to stretch to seven times income for many of the purchases that he was helping arrange.
He said he would not have been able to buy his own house at a ratio of four or five times income.
‘‘The wealthy will get wealthier and the poor will get poorer. It would be very dangerous for the market.’’ Olly Newland Property commentator
‘‘Anything less than [seven times] is going to kill the market.’’
With interest rates near historic lows, he said the impact of a high debt-to-income ratio was not so bad.
‘‘If interest rates were 8 per cent or 9 per cent, it would be a different story. That’s where management of loans becomes more and more important.’’
Based on Statistics New Zealand average incomes for 30- to 35-year-olds, a five-times income restriction would mean a firsthome buyer might only be able to borrow $200,000 in Auckland, $255,000 in Wellington and $260,520 in Canterbury.
‘‘There’s some scary numbers in there,’’ said Mark Collins, chief executive of Liberty, which also runs the Mike Pero Mortgages chain of mortgage brokers.
‘‘If you want to get into the average house in 26 suburbs of Auckland where it’s over $1 million you’d have to have a household income of $200,000 between you; that is something like 4 per cent of the population.’’
He said the heat would come out of the top end of the market first, and also affect investors significantly.
‘‘Which is the bulk of the market at the moment. A lot have been using their equity to keep buying houses and the interest rates make that comfortable to service, so the loan-to-value restrictions aren’t impeding them much at the moment.’’
Taking them out would have a softening effect on prices, he said.
Property commentator Olly Newland warned introducing debtto-income ratios would ‘‘just about collapse the property market’’.
‘‘The wealthy will get wealthier and the poor will get poorer,’’ he said. ‘‘It would be very dangerous for the market.’’
Banks are already taking matters into their own hands, introducing rules for foreign buyers and introducing more restrictive criteria.
Mcleod said they were asking more questions about borrowers’ ability to service their mortgages. He said it could be an attempt at a pre-emptive strike, to ward off formal rules.
‘‘I would hate to see debt-toincome ratios brought in but I don’t think we’re going to get past it. The Reserve Bank is hell bent on cooling off the market,’’ he said.
Andrew King, executive officer of the New Zealand Property Investors Federation, said it was important that policysetters understood the flow-on effects of any changes.
Debt-to-income ratios would likely curtail the number of new investors entering the market, which could dampen rental supply and push up rents – making it harder for first-home buyers to save for a deposit, he said.
‘‘When you’re just starting out, you don’t have the income. Buying a rental property is very hard in the first few years. It’s extremely difficult,’’ he said.
‘‘If we’re going to make it even harder it will push people out.’’
Too heavy-handed a response could cause a correction in the market that would hurt those who had stretched to buy their first homes, he said.
‘‘If we overdo the response now it could make things worse in a couple of years’ time when the whole system changes again.
‘‘Bank people are saying [the Reserve Bank] is going down the road to doing this. I hope they don’t because once you get government departments trying to control markets there are usually unintended consequences.’’