New Zealand pointing the way with higher interest rates and loan caps
Could debt-to-income limits be on their way to Australia to keep the lid on housing prices after New Zealand Reserve Bank foreshadowed it will impose a ratio on all the country’s banks?
Our cousins in New Zealand are ahead of the curve on so many things that the country is an interesting laboratory to see what might be coming here in Australia.
New Zealand’s housing boom is very mature with prices rising a stellar 31% over the past year to almost NZ$1 million, prompting some government tax changes to try to keep a lid on prices – something that has been mooted here but is in the early stages.
Inflation has risen faster and earlier in New Zealand, 4.9% for the September year compared to our 3%, although the latest figures show we are catching up fast.
Interest rates already rising
That higher inflation led to the New Zealand Reserve Bank doubling official interest rates from 0.25% to 0.5% – potentially leaving our Reserve Bank with the task of winding back its rhetoric about not raising its official rate of 0.1% until early 2024.
That promise is looking much harder to keep now that the RBA’s inflation forecasts have been overtaken by events, with our latest headline quarterly inflation rate of 0.8% recorded being much higher than expected, while Sydney and Melbourne were still locked down.
This inflation rise is a global issue but it is not one that the RBA can afford to ignore, given that countries including New Zealand, Canada, Norway, the Czech Republic and South Korea have all either increased interest rates or cut back on bond buying to tighten monetary policy.
RBA decision will be vital
While the RBA is not expected to raise rates or ease back on bond buying in the decision it will release on Melbourne Cup Day, it is shaping up as one of the most important RBA announcements as the board reacts to the changing economic situation.
It would be a brave move to hang on to the current settings without at least signalling the chance for a change to allow future moves to keep ahead of rising inflation should it continue to rise.
Home loan regulation ahead in NZ
Another area in which New Zealand is ahead of Australia is in regulating home loans to take stellar price rises into account.
Bank of New Zealand (BNZ), which is owned by Australia’s NAB (ASX: NAB), has taken the revolutionary step of limiting the amount people can borrow to buy a house to six times their income when they apply for a loan through a broker.
It is the first mainstream New Zealand bank to formally adopt a debt-to-income ratio for home lending. Although there are indications that it will not be the last given the political heat that has come with such rapid house price rises and dwindling affordability.
Ratios will increase loan safety and retard price growth
BNZ said it was acting as part of its role as a responsible lender.
“With an increased regulatory focus on debt-to-Income ratios as a way to deliver a more sustainable housing market, BNZ is making some changes to the way it assesses loans in our broker channel,’’ the bank said.
“We are looking at the overall level of debt our customers take on to ensure they are in a secure position with rising interest rates.
“Presently, this will be set at six times but like all of our lending policies, we will be constantly monitoring and reviewing.’’
The change means that a household with a combined income of $150,000 would not be able to borrow more than $900,000 and it applies to both owner-occupiers and investors.
Debt serviceability restrictions gaining pace
Debt to income ratios have been foreshadowed by the New Zealand Reserve Bank and there is a strong chance it will impose a ratio on all of the banks as a way of keeping a lid on house prices and to reduce the risk of loans turning bad if interest rates keep rising.
The central bank announced it had reached an agreement with Finance Minister Grant Robertson over adding “debt serviceability restrictions” to the tools it could use.
New rules have also been added credit contracts so that lenders can impose extra scrutiny on applications to ensure that borrowers can afford their loans.
Mr Robertson said he believed the debt-to-income controls should apply only to investors but the New Zealand Reserve Bank has signalled it believes a single limit could be set at a level that would largely achieve that.
The bank said its analysis showed tools such as debt-to-income limits were likely to be “the most effective additional tool that could be deployed by the Reserve Bank to support financial stability and house price sustainability”.
Ratios also used in the UK
The controls are used overseas to limit how much people can borrow to a multiple of their income. In Britain, borrowers are often limited to no more than 4.5 times their annual earnings.
The New Zealand Reserve Bank said a debt-to-income ratio of seven would have a minimal effect on first-home buyers but deter some investors, and a cap of six would have an impact on moderating house prices and dampening investor demand but could also prevent some first-home buyers entering the market.
While there have been changes to the interest rate safety margin in Australian home loans, it would not be a surprise if we start to see discussions around debt-to-income limits here in Australia.