Reserve Bank drops hammer on highly leveraged mortgage borrowers

In 2021, New Zealand dwelling values rocketed by around 30%.

One of the key drivers of this extreme price growth was that one-third of mortgage borrowers in 2021 borrowed at an extreme debt-to-income (DTI) ratio of six or more, equating to around $32.6 billion worth of mortgages:

New Zealand mortgage debt-to-income ratios

New Zealand home buyers leveraged-up in 2021.

This has left thousands of Kiwi borrowers in a precarious position as mortgage rates rise and house prices fall.

Accordingly, the Reserve Bank of New Zealand (RBNZ) is preparing a framework that would potentially tighten DTI limits by mid-2023:

We use macroprudential policy to reduce systemic risk associated with ‘boom-bust’ cycles in which the financial system amplifies a severe downturn in the real economy…

Following consideration of the submissions, we intend to proceed with designing a framework for operationalising debt-to-income (DTI) restrictions, in consultation with the industry and other stakeholders. We believe that DTI limits are an important additional tool for reducing financial stability risks and supporting house price sustainability, and would fill a gap that is not covered by existing regulations. We plan to have the framework finalised by late 2022, so that restrictions could be introduced by mid-2023 if required… provided further context:

“Our modelling indicates that first-home buyers would be the least impacted by a DTI restriction, with investors impacted the most as they tend to borrow at higher DTIs than other groups on average,” Reserve Bank Deputy Governor and General Manager of Financial Stability Christian Hawkesby says.

“This aligns with our Memorandum of Understanding with the Minister of Finance on macroprudential policy which states that in designing DSRs, we will have regard to avoiding negative impacts, as much as possible, on first-home buyers. Additionally, the use of speed limits and exemptions can further mitigate any negative long term impacts on first-home buyers.”

Imposing DTI limits is obviously sensible as it would limit financial stability risks, reduce household debt loads (other things equal) and mitigate boom/bust cycles in New Zealand house prices. Indeed the Irish Central Bank imposed a DTI of 3.5 times in 2015 and has successfully de-leveraged the household sector:

Household debt-to-GDP

Excessive leverage over the pandemic is one of the reasons why New Zealand households and house prices are now is such a precarious position as interest rates rise. Implementing DTI limits would reduce the likelihood of repeating the same situation.

Unconventional Economist
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  1. The Irish delverage is imrpressive. Just looked at their price index, and prices have reinflated since ~2014 back to the GFC peak (in nominal terms).

    How on earth did they manage that without everyone releveraging? Do foreigners own the housing stock now?

    • Hugh PavletichMEMBER

      Post the ’07 bust, Ireland failed to deal with the structural issues of land supply and infrastructure debt financing.

    • The Irish have had a severe shortage of housing in their main places (eg Dublin) for many decades.

      Over the decades of this shortage price boomed and busted and boomed along with various financial comings and goings.

      But over the decades the physical shortage of housing and the physical suffering of many Irish continued unabated.

      The solution is to stop discussing price and instead concentrate on working to improve the physical housing situation in Dublin.

  2. Goldstandard1MEMBER

    Who could have known this would happen? /s Meanwhile our incompetent treasure tried to lower leverage % floors with the banks because there was no risk. They are about to feel risk.

  3. I would be interested to hear how our negative gearing tax laws impact our ratio? i.e. does Canada, USA or UK allow negative gearing? Presumably with negative gearing we are able to borrow more against our income?


      It appears no other country other than NZ (that changed recently) allow the incredible negative gearing allowed in Aus. It truly is a nuts rule and a promoter of inequality…or a promoter of dwelling construction and jobs?

      NB yes I do take advantage of negative gearing…hate the game not the player.

    • No negative gearing in the UK, in fact investors cant even fully offset the mortgage interest from their rental income = higher tax on their investment property income.

      UK Banks are also restricted from having only 15% of their mortgage loan book above 4.5 income/debt ratio, which curtails lending

        • “actual data” lol. Where do you reckon they got the data from? I reckon it was a survey. And I also reckon that ppl that lie on a mortgage application form might also like in an anonymous survey..
          Still, trust what you like.

          • 100% liar loans means that you and all of your friends are admitting that you lie on your credit applications

          • I just think that if you look at who was borrowing in that period, and how much they were borrowing, then there would have had to be a very high level of fibbing, probably encouraged by the lenders.

    • Open banking API’s will fix all of this, should they ever become real. All bank accounts you own will be trawled by your prospective lender for signs of BS. I bet they will find mountains of BS in their previous assumptions.

  4. Imposing DTI limits now is closing the barn door well after the horse has bolted. In fact, the horse has calmed down, had a drink, and a roll, and is now quietly grazing in the back paddock…

    A mortgage crisis among FHBs and some investors is not an inevitability.