The New Zealand Treasury has entered the Auckland housing bubble debate, urging the Reserve Bank of New Zealand (RBNZ) to consider implementing debt-to-income ratios either alongside or instead of the current speed limit on high loan-to-value ratio mortgage lending. Here are the money quotes via correspondence released under the Official Information Act:
Overall, the Treasury supports the RBNZ’s view that recent developments in the Auckland housing market could potentially pose a threat to financial stability over the medium term and that although there may not be signs that a systemic risk may crystallise imminently, there is cause for vigilance. Given the consequences of doing too little too late, we support the case for intervention…
The Treasury acknowledges that identifying a bubble is difficult and that the debate is still very much ongoing in the academic literature. Rapidly rising house prices are required to fuel a bubble and the question is how far and fast does asset price inflation need to be in order to give rise to unsustainable expectation dynamics that may stoke developments ending in financial stability… That said, in these circumstances, it may well be better to act early than too late given the extreme costs of a potential crisis scenario…
That said, households and investors who are heavily leveraged and/or have high servicing requirements are more vulnerable to defaulting on that debt. The most vulnerable are likely to include purchases based on expectations of future price rises if a mortgage is unsustainable in the absence of expected appreciation in the value of property over time…
Many home buyers are using a significant amount of leverage to buy houses, meaning that the macroprudential consequences is a credit story…
The Treasury agrees that high house prices to income ratios in Auckland are cause for concern…
Treasury analysis shows that aggregate debt of New Zealand households increased significantly in the decade leading up to 2008. The increase was large and historically unprecedented…
The potential warning signs in the credit story are around the impact of high household debt, as it forms a substantial proportion of banks’ balance sheets and due to the potential impact on household consumption in the event of a macroeconomic shock. High levels of debt also increase the vulnerability of households to downturns…
Debt-to-income limits (DTIs) are an alternative macroprudential tool that would offer an alternative or additional way of managing financial system vulnerability by targeting the likelihood of default.
We appreciate that this is more difficult to implement in practice… [and] we welcome the RBNZ’s work on DTI data since then, and look forward to development in this area…
One wonders whether similar discussions are taking place within the bowels of the Australian Treasury and the RBA. We can only hope.
